UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, ~~2022~~2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-12507

ARROW FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)


New York						22-2448962
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)

250 Glen Street

Glens Falls

New York

12801

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code:

518

745-1000

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common Stock, Par Value $1.00 per share	AROW	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☑
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. __			☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class						Outstanding as of October ~~31, 2022~~27, 2023
Common Stock, par value $1.00 per share						~~16,528,659~~17,055,266

ARROW FINANCIAL CORPORATION

FORM 10-Q

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)


		September 30, 2022		December 31, 2021		September 30, 2021			September 30, 2023		December 31, 2022		September 30, 2022
ASSETS	ASSETS							ASSETS
Cash and Due From Banks	Cash and Due From Banks	$	44,872	$	26,978	$	49,430	Cash and Due From Banks	$	39,778	$	31,886	$	44,872
Interest-Bearing Deposits at Banks	Interest-Bearing Deposits at Banks	328,557		430,718		548,936		Interest-Bearing Deposits at Banks	254,961		32,774		328,557
Investment Securities:	Investment Securities:							Investment Securities:
Available-for-Sale at Fair Value	Available-for-Sale at Fair Value	575,054		559,316		486,900		Available-for-Sale at Fair Value	519,240		573,495		575,054
Held-to-Maturity (Fair Value of $175,800 at September 30, 2022; $201,292 at December 31, 2021; and $203,936 at September 30, 2021)		182,178		196,566		198,337
Held-to-Maturity (Fair Value of $134,811 at September 30, 2023; $171,623 at December 31, 2022; and $175,800 at September 30, 2022)								Held-to-Maturity (Fair Value of $134,811 at September 30, 2023; $171,623 at December 31, 2022; and $175,800 at September 30, 2022)	140,577		175,364		182,178
Equity Securities	Equity Securities	2,126		1,747		1,886		Equity Securities	1,960		2,174		2,126
FHLB and Federal Reserve Bank Stock	FHLB and Federal Reserve Bank Stock	4,720		5,380		5,380		FHLB and Federal Reserve Bank Stock	5,110		6,064		4,720
Loans	Loans	2,924,794		2,667,941		2,654,751		Loans	3,138,617		2,983,207		2,924,794
Allowance for Credit Losses	Allowance for Credit Losses	(29,232)		(27,281)		(26,956)		Allowance for Credit Losses	(31,112)		(29,952)		(29,232)
Net Loans	Net Loans	2,895,562		2,640,660		2,627,795		Net Loans	3,107,505		2,953,255		2,895,562
Premises and Equipment, Net	Premises and Equipment, Net	54,015		46,217		44,003		Premises and Equipment, Net	60,311		56,491		54,015
Goodwill	Goodwill	21,873		21,873		21,873		Goodwill	21,873		21,873		21,873
Other Intangible Assets, Net	Other Intangible Assets, Net	1,604		1,918		2,006		Other Intangible Assets, Net	1,205		1,500		1,604
Other Assets	Other Assets	122,217		96,579		84,558		Other Assets	120,391		114,633		122,217
Total Assets	Total Assets	$	4,232,778	$	4,027,952	$	4,071,104	Total Assets	$	4,272,911	$	3,969,509	$	4,232,778
LIABILITIES	LIABILITIES							LIABILITIES
Noninterest-Bearing Deposits	Noninterest-Bearing Deposits	$	910,221	$	810,274	$	841,910	Noninterest-Bearing Deposits	$	798,392	$	836,871	$	910,221
Interest-Bearing Checking Accounts	Interest-Bearing Checking Accounts	1,113,850		994,391		1,035,358		Interest-Bearing Checking Accounts	920,250		997,694		1,113,850
Savings Deposits	Savings Deposits	1,584,373		1,531,287		1,515,692		Savings Deposits	1,496,193		1,454,364		1,584,373
Time Deposits over $250,000	Time Deposits over $250,000	59,059		82,811		73,889		Time Deposits over $250,000	167,614		76,224		59,059
Other Time Deposits	Other Time Deposits	127,602		131,734		138,714		Other Time Deposits	284,036		133,211		127,602
Total Deposits	Total Deposits	3,795,105		3,550,497		3,605,563		Total Deposits	3,666,485		3,498,364		3,795,105
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase		—		—		2,426
Borrowings								Borrowings	174,300		54,800		25,000

Federal Home Loan Bank Term Advances		25,000		45,000		45,000

Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		20,000		Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		20,000
Finance Leases	Finance Leases	5,131		5,169		5,181		Finance Leases	5,080		5,119		5,131
Other Liabilities	Other Liabilities	41,992		36,100		32,763		Other Liabilities	47,032		37,688		41,992
Total Liabilities	Total Liabilities	3,887,228		3,656,766		3,710,933		Total Liabilities	3,912,897		3,615,971		3,887,228
STOCKHOLDERS’ EQUITY	STOCKHOLDERS’ EQUITY							STOCKHOLDERS’ EQUITY
Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at September 30, 2022, December 31, 2021 and September 30, 2021		—		—		—
Common Stock, $1 Par Value; 30,000,000 Shares Authorized (21,423,992 Shares Issued at September 30, 2022 and 20,800,144 at December 31, 2021 and September 30, 2021)		21,424		20,800		20,800
Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at September 30, 2023, December 31, 2022 and September 30, 2022								Preferred Stock, $1 Par Value and 1,000,000 Shares Authorized at September 30, 2023, December 31, 2022 and September 30, 2022	—		—		—
Common Stock, $1 Par Value; 30,000,000 Shares Authorized (22,066,559 Shares Issued at September 30, 2023 and 21,423,992 Shares Issued at December 31, 2022 and September 30, 2022)								Common Stock, $1 Par Value; 30,000,000 Shares Authorized (22,066,559 Shares Issued at September 30, 2023 and 21,423,992 Shares Issued at December 31, 2022 and September 30, 2022)	22,067		21,424		21,424
Additional Paid-in Capital	Additional Paid-in Capital	399,461		377,996		377,349		Additional Paid-in Capital	412,397		400,270		399,461
Retained Earnings	Retained Earnings	57,778		54,078		47,936		Retained Earnings	62,647		65,401		57,778

Accumulated Other Comprehensive (Loss) Income		(49,070)		347		(3,719)
Treasury Stock, at Cost (4,900,975 Shares at September 30, 2022; 4,759,414 Shares at December 31, 2021 and 4,780,496 Shares at September 30, 2021)		(84,043)		(82,035)		(82,195)
Accumulated Other Comprehensive Loss								Accumulated Other Comprehensive Loss	(52,584)		(49,655)		(49,070)
Treasury Stock, at Cost (5,017,063 Shares at September 30, 2023; 4,872,355 Shares at December 31, 2022 and 4,900,975 Shares at September 30, 2022)								Treasury Stock, at Cost (5,017,063 Shares at September 30, 2023; 4,872,355 Shares at December 31, 2022 and 4,900,975 Shares at September 30, 2022)	(84,513)		(83,902)		(84,043)
Total Stockholders’ Equity	Total Stockholders’ Equity	345,550		371,186		360,171		Total Stockholders’ Equity	360,014		353,538		345,550
Total Liabilities and Stockholders’ Equity	Total Liabilities and Stockholders’ Equity	$	4,232,778	$	4,027,952	$	4,071,104	Total Liabilities and Stockholders’ Equity	$	4,272,911	$	3,969,509	$	4,232,778

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Amounts)

(Unaudited)


		Three Months Ended September 30,				Nine Months Ended September 30,					Three Months Ended September 30				Nine Months Ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
INTEREST AND DIVIDEND INCOME	INTEREST AND DIVIDEND INCOME									INTEREST AND DIVIDEND INCOME
Interest and Fees on Loans	Interest and Fees on Loans	$	29,618	$	27,157	$	82,263	$	79,354	Interest and Fees on Loans	$	36,699	$	29,618	$	103,203	$	82,263
Interest on Deposits at Banks	Interest on Deposits at Banks	1,201		163		1,826		351		Interest on Deposits at Banks	1,805		1,201		3,958		1,826
Interest and Dividends on Investment Securities:	Interest and Dividends on Investment Securities:									Interest and Dividends on Investment Securities:
Fully Taxable	Fully Taxable	2,603		1,632		7,236		4,809		Fully Taxable	2,924		2,603		8,823		7,236
Exempt from Federal Taxes	Exempt from Federal Taxes	785		855		2,422		2,682		Exempt from Federal Taxes	689		785		2,256		2,422
Total Interest and Dividend Income	Total Interest and Dividend Income	34,207		29,807		93,747		87,196		Total Interest and Dividend Income	42,117		34,207		118,240		93,747
INTEREST EXPENSE	INTEREST EXPENSE									INTEREST EXPENSE
Interest-Bearing Checking Accounts	Interest-Bearing Checking Accounts	267		155		629		566		Interest-Bearing Checking Accounts	1,156		267		2,346		629
Savings Deposits	Savings Deposits	2,469		424		3,778		1,490		Savings Deposits	9,729		2,469		23,830		3,778
Time Deposits over $250,000	Time Deposits over $250,000	89		39		143		228		Time Deposits over $250,000	1,466		89		3,159		143
Other Time Deposits	Other Time Deposits	150		133		370		511		Other Time Deposits	2,051		150		3,721		370
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase		—		—		—		3
Federal Home Loan Bank Advances		110		197		405		586

Borrowings										Borrowings	2,143		110		5,309		405
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	173		173		513		513		Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	173		173		513		513
Interest on Financing Leases	Interest on Financing Leases	48		48		145		146		Interest on Financing Leases	46		48		143		145
Total Interest Expense	Total Interest Expense	3,306		1,169		5,983		4,043		Total Interest Expense	16,764		3,306		39,021		5,983
NET INTEREST INCOME	NET INTEREST INCOME	30,901		28,638		87,764		83,153		NET INTEREST INCOME	25,353		30,901		79,219		87,764
Provision for Credit Losses	Provision for Credit Losses	1,715		99		3,389		(286)		Provision for Credit Losses	354		1,715		2,856		3,389
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	29,186		28,539		84,375		83,439		NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	24,999		29,186		76,363		84,375
NONINTEREST INCOME
NON-INTEREST INCOME										NON-INTEREST INCOME
Income From Fiduciary Activities	Income From Fiduciary Activities	2,341		2,571		7,454		7,538		Income From Fiduciary Activities	2,378		2,341		7,081		7,454
Fees for Other Services to Customers	Fees for Other Services to Customers	3,071		2,966		8,916		8,494		Fees for Other Services to Customers	2,761		3,071		8,073		8,916
Insurance Commissions	Insurance Commissions	1,650		1,576		4,783		4,842		Insurance Commissions	1,695		1,650		4,775		4,783
Net Gain (Loss) on Securities	Net Gain (Loss) on Securities	95		(106)		379		250		Net Gain (Loss) on Securities	71		95		(214)		379
Net Gain on Sales of Loans	Net Gain on Sales of Loans	18		211		80		2,251		Net Gain on Sales of Loans	21		18		25		80
Other Operating Income	Other Operating Income	652		476		2,121		1,405		Other Operating Income	1,124		652		1,893		2,121
Total Noninterest Income		7,827		7,694		23,733		24,780
NONINTEREST EXPENSE
Total Non-Interest Income										Total Non-Interest Income	8,050		7,827		21,633		23,733
NON-INTEREST EXPENSE										NON-INTEREST EXPENSE
Salaries and Employee Benefits	Salaries and Employee Benefits	12,427		11,377		35,400		33,360		Salaries and Employee Benefits	11,988		12,427		35,974		35,400
Occupancy Expenses, Net	Occupancy Expenses, Net	1,521		1,403		4,721		4,480		Occupancy Expenses, Net	1,517		1,521		4,728		4,721
Technology and Equipment Expense	Technology and Equipment Expense	4,049		3,833		11,802		11,002		Technology and Equipment Expense	4,371		4,049		13,150		11,802
FDIC Assessments	FDIC Assessments	295		249		893		764		FDIC Assessments	515		295		1,478		893
Other Operating Expense	Other Operating Expense	3,156		2,561		7,922		7,582		Other Operating Expense	5,088		3,156		14,528		7,922
Total Noninterest Expense		21,448		19,423		60,738		57,188
Total Non-Interest Expense										Total Non-Interest Expense	23,479		21,448		69,858		60,738
INCOME BEFORE PROVISION FOR INCOME TAXES	INCOME BEFORE PROVISION FOR INCOME TAXES	15,565		16,810		47,370		51,031		INCOME BEFORE PROVISION FOR INCOME TAXES	9,570		15,565		28,138		47,370
Provision for Income Taxes	Provision for Income Taxes	3,402		3,821		10,658		11,483		Provision for Income Taxes	1,827		3,402		5,786		10,658
NET INCOME	NET INCOME	$	12,163	$	12,989	$	36,712	$	39,548	NET INCOME	$	7,743	$	12,163	$	22,352	$	36,712
Average Shares Outstanding 1:	Average Shares Outstanding 1:									Average Shares Outstanding 1:
Basic	Basic	16,512		16,508		16,506		16,495		Basic	17,050		17,007		17,049		17,001
Diluted	Diluted	16,558		16,568		16,553		16,554		Diluted	17,050		17,054		17,049		17,050
Per Common Share:	Per Common Share:									Per Common Share:
Basic Earnings	Basic Earnings	$	0.74	$	0.79	$	2.22	$	2.40	Basic Earnings	$	0.46	$	0.72	$	1.31	$	2.16
Diluted Earnings	Diluted Earnings	0.74		0.78		2.22		2.39		Diluted Earnings	0.46		0.72		1.31		2.15

12022 Share and Per Share Amounts have been restated for the September ~~23, 2022~~26, 2023 3% stock dividend.

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) ~~INCOME~~

(In Thousands)

(Unaudited)


		Three Months Ended September 30				Nine Months Ended September 30					Three Months Ended September 30:				Nine Months Ended September 30
		2022		2021		2022		2021			2023		2022		2023		2022
Net Income	Net Income	$	12,163	$	12,989	$	36,712	39,548		Net Income	$	7,743	$	12,163	$	22,352	$	36,712
Other Comprehensive (Loss) Income, Net of Tax:
Other Comprehensive Income (Loss), Net of Tax:										Other Comprehensive Income (Loss), Net of Tax:
Net Unrealized Securities Holding Loss Arising During the Period	Net Unrealized Securities Holding Loss Arising During the Period	(20,801)		(1,279)		(52,808)		(3,969)		Net Unrealized Securities Holding Loss Arising During the Period	(5,786)		(20,801)		(3,536)		(52,808)

Net Unrealized Gain on Cash Flow Hedge Agreements	Net Unrealized Gain on Cash Flow Hedge Agreements	778		183		2,781		954		Net Unrealized Gain on Cash Flow Hedge Agreements	625		778		91		2,781
Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	55		(25)		42		(68)		Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	181		55		491		42

Amortization of Net Retirement Plan Actuarial Loss		420		17		441		51
Amortization of Net Retirement Plan Actuarial (Gain) Loss										Amortization of Net Retirement Plan Actuarial (Gain) Loss	(30)		420		(90)		441
Amortization of Net Retirement Plan Prior Service Cost	Amortization of Net Retirement Plan Prior Service Cost	42		43		127		129		Amortization of Net Retirement Plan Prior Service Cost	39		42		115		127
Other Comprehensive Loss	Other Comprehensive Loss	(19,506)		(1,061)		(49,417)		(2,903)		Other Comprehensive Loss	(4,971)		(19,506)		(2,929)		(49,417)
Comprehensive (Loss) Income		$	(7,343)	$	11,928	$	(12,705)	$	36,645
Comprehensive Income (Loss)										Comprehensive Income (Loss)	$	2,772	$	(7,343)	$	19,423	$	(12,705)

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(In Thousands, Except Share and Per Share Amounts)

(Unaudited)

Nine Month Period Ended September 30, 2022
Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumu-lated
Other Com-
prehensive
Income (Loss) Treasury
Stock Total
Balance at December 31, 2021 $ 20,800 $ 377,996 $ 54,078 $ 347 $ (82,035) $ 371,186
Net Income — — 36,712 — — 36,712
Other Comprehensive Loss — — — (49,417) — (49,417)
3% Stock Dividend (623,848 Shares) 624 19,408 (20,032) — — —
Cash Dividends Paid, $.786 per Share 1
— — (12,980) — — (12,980)
Stock Options Exercised, Net  (17,284 Shares) — 215 — — 151 366
Shares Issued Under the Directors’ Stock
  Plan (8,693 Shares)
— 210 — — 75 285
Shares Issued Under the Employee Stock
  Purchase Plan (11,416 Shares)
— 261 — — 100 361
Shares Issued for Dividend
  Reinvestment Plans (43,673 Shares)
— 1,033 — — 387 1,420
Stock-Based Compensation Expense — 338 — — — 338
Purchase of Treasury Stock
  (79,881 Shares)
— — — — (2,721) (2,721)
Balance at September 30, 2022 $ 21,424 $ 399,461 $ 57,778 $ (49,070) $ (84,043) $ 345,550
Three Month Period Ended September 30, 2022
Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumu-lated
Other Com-
prehensive
Loss Treasury
Stock Total
Balance at June 30 , 2022 $ 20,800 $ 379,423 $ 69,980 $ (29,564) $ (84,141) $ 356,498
Net Income — — 12,163 — — 12,163
Other Comprehensive Loss — — — (19,506) — (19,506)
3% Stock Dividend (623,848 Shares) 624 19,408 (20,032) — — —
Cash Dividends Paid, $.262 per Share 1
— — (4,333) — — (4,333)
Stock Options Exercised, Net  (1,406 Shares) — 27 — — 13 40
Shares Issued Under the Directors’ Stock
  Plan (2,923 Shares)
— 67 — — 25 92
Shares Issued Under the Employee Stock
  Purchase Plan (3,855 Shares)
— 85 — — 34 119
Shares Issued for Dividend
  Reinvestment Plans (14,521 Shares)
— 337 — — 134 471
Stock-Based Compensation Expense — 114 — — — 114
Purchase of Treasury Stock
  (3,329 Shares)
— — — — (108) (108)
Balance at September 30, 2022 $ 21,424 $ 399,461 $ 57,778 $ (49,070) $ (84,043) $ 345,550


	Nine Month Period Ended September 30, 2023
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumu-lated Other Com- prehensive Income (Loss)		Treasury Stock		Total
Balance at December 31, 2022	$	21,424	$	400,270	$	65,401	$	(49,655)	$	(83,902)	$	353,538


Net Income	—		—		22,352		—		—		22,352
Other Comprehensive Loss	—		—		—		(2,929)		—		(2,929)


3% Stock Dividend (642,567 Shares)	643		11,058		(11,701)		—		—		—
Cash Dividends Paid, $.786 per Share 1	—		—		(13,405)		—		—		(13,405)
Stock Options Exercised, Net (3,772 Shares)	—		50		—		—		33		83
Shares Issued Under the Directors’ Stock Plan (3,418 Shares)	—		85		—		—		29		114
Shares Issued Under the Employee Stock Purchase Plan (3,872 Shares)	—		87		—		—		33		120
Shares Issued for Dividend Reinvestment Plans (17,753 Shares)	—		330		—		—		142		472
Stock-Based Compensation Expense	—		517		—		—		—		517

Purchase of Treasury Stock (27,395 Shares)	—		—		—		—		(848)		(848)



Balance at September 30, 2023	$	22,067	$	412,397	$	62,647	$	(52,584)	$	(84,513)	$	360,014

	Three Month Period Ended September 30, 2023
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumu-lated Other Com- prehensive Loss		Treasury Stock		Total
Balance at June 30, 2023	$	21,424	$	401,069	$	71,076	$	(47,613)	$	(84,513)	$	361,443


Net Income	—		—		7,743		—		—		7,743
Other Comprehensive Loss	—		—		—		(4,971)		—		(4,971)


3% Stock Dividend (642,567 Shares)	643		11,058		(11,701)		—		—		—
Cash Dividends Paid, $.262 per Share	—		—		(4,471)		—		—		(4,471)




Stock-Based Compensation Expense	—		270		—		—		—		270





Balance at September 30, 2023	$	22,067	$	412,397	$	62,647	$	(52,584)	$	(84,513)	$	360,014

Nine Month Period Ended September 30, 2021
Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumu-lated
Other Com-
prehensive
Loss Treasury
Stock Total
Balance at December 31, 2020 $ 20,194 353,662 41,899 $ (816) $ (80,547) $ 334,392
Cumulative impact of adoption of ASU 2016-13 120 120
Balance at January 1, 2021 as adjusted for impact of adoption of ASU 2016-13 20,194 353,662 42,019 (816) (80,547) 334,512
Net Income — — 39,548 — — 39,548
Other Comprehensive Loss — — — (2,903) — (2,903)
3% Stock Dividend (605,670 Shares) 606 20,896 (21,502) — — —
Cash Dividends Paid, $.735 per Share 1
— — (12,129) — — (12,129)
Stock Options Exercised, Net (52,610 Shares) — 983 — — 470 1,453
Shares Issued Under the Directors’ Stock
  Plan (8,471 Shares)
— 208 — — 76 284
Shares Issued Under the Employee Stock
  Purchase Plan (11,304 Shares)
— 262 — — 101 363
Shares Issued for Dividend
  Reinvestment Plans (37,841 Shares)
— 1,028 — — 338 1,366
Stock-Based Compensation Expense — 310 — — — 310
Purchase of Treasury Stock
(72,750 Shares)
— — — — (2,633) (2,633)
Balance at September 30, 2021 $ 20,800 $ 377,349 $ 47,936 $ (3,719) $ (82,195) $ 360,171
Three Month Period Ended September 30, 2021
Common
Stock Additional
Paid-In
Capital Retained
Earnings Accumu-lated
Other Com-
prehensive
Loss Treasury
Stock Total
Balance at June 30, 2021 $ 20,194 $ 355,195 $ 60,494 $ (2,658) $ (80,192) $ 353,033
Net Income — — 12,989 — — 12,989
Other Comprehensive Income — — — (1,061) — (1,061)
3% Stock Dividend (605,670 Shares) 606 20,896 (21,502) — — —
Cash Dividends Paid, $.245 per Share 1
— — (4,045) — — (4,045)
Stock Options Exercised, Net (30,346 Shares) — 657 — — 271 928
Shares Issued Under the Directors’ Stock
  Plan (2,627 Shares)
— 71 — — 24 95
Shares Issued Under the Employee Stock
  Purchase Plan (3,387 Shares)
— 87 — — 30 117
Shares Issued for Dividend
  Reinvestment Plans (12,826 Shares)
— 340 — — 115 455
Stock-Based Compensation Expense — 103 — — — 103
Purchase of Treasury Stock
(67,649 Shares)
— — — — (2,443) (2,443)
Balance at September 30, 2021 $ 20,800 $ 377,349 $ 47,936 $ (3,719) $ (82,195) $ 360,171


	Nine Month Period Ended September 30, 2022
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumu-lated Other Com- prehensive Loss		Treasury Stock		Total
Balance at December 31, 2021	$	20,800	377,996		54,078		$	347	$	(82,035)	$	371,186


Net Income	—		—		36,712		—		—		36,712
Other Comprehensive Loss	—		—		—		(49,417)		—		(49,417)


3% Stock Dividend (623,848 Shares)	624		19,408		(20,032)		—		—		—
Cash Dividends Paid, $.764 per Share 1	—		—		(12,980)		—		—		(12,980)
Stock Options Exercised, Net (17,284 Shares)	—		215		—		—		151		366
Shares Issued Under the Directors’ Stock Plan (8,693 Shares)	—		210		—		—		75		285
Shares Issued Under the Employee Stock Purchase Plan (11,416 Shares)	—		261		—		—		100		361
Shares Issued for Dividend Reinvestment Plans (43,673 Shares)	—		1,033		—		—		387		1,420
Stock-Based Compensation Expense	—		338		—		—		—		338

Purchase of Treasury Stock (79,881 Shares)	—		—		—		—		(2,721)		(2,721)


Balance at September 30, 2022	$	21,424	$	399,461	$	57,778	$	(49,070)	$	(84,043)	$	345,550

	Three Month Period Ended September 30, 2022
	Common Stock		Additional Paid-In Capital		Retained Earnings		Accumu-lated Other Com- prehensive Loss		Treasury Stock		Total
Balance at June 30, 2022	$	20,800	$	379,423	$	69,980	$	(29,564)	$	(84,141)	$	356,498
Net Income	—		—		12,163		—		—		12,163
Other Comprehensive Loss	—		—		—		(19,506)		—		(19,506)


3% Stock Dividend (623,848 Shares)	624		19,408		(20,032)		—		—		—
Cash Dividends Paid, $.255 per Share 1	—		—		(4,333)		—		—		(4,333)
Stock Options Exercised, Net (1,406 Shares)	—		27		—		—		13		40
Shares Issued Under the Directors’ Stock Plan (2,923 Shares)	—		67		—		—		25		92
Shares Issued Under the Employee Stock Purchase Plan (3,855 Shares)	—		85		—		—		34		119
Shares Issued for Dividend Reinvestment Plans (14,521 Shares)	—		337		—		—		134		471
Stock-Based Compensation Expense	—		114		—		—		—		114

Purchase of Treasury Stock (3,329 Shares)	—		—		—		—		(108)		(108)


Balance at September 30, 2022	$	21,424	$	399,461	$	57,778	$	(49,070)	$	(84,043)	$	345,550

1 Cash dividends paid per share have been adjusted for the September ~~23, 2022~~26, 2023 3% stock dividend.

See Notes to Unaudited Interim Consolidated Financial Statements.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in Thousands)


		Nine Months Ended September 30,					Nine Months Ended September 30,
Cash Flows from Operating Activities:	Cash Flows from Operating Activities:	2022		2021		Cash Flows from Operating Activities:	2023		2022
Net Income	Net Income	$	36,712	$	39,548	Net Income	$	22,352	$	36,712

Provision for Credit Losses	Provision for Credit Losses	3,389		(286)		Provision for Credit Losses	2,856		3,389
Depreciation and Amortization	Depreciation and Amortization	5,845		5,894		Depreciation and Amortization	4,962		5,845

Net Gain on Securities Transactions		(379)		(250)
Net Loss (Gain) on Securities Transactions						Net Loss (Gain) on Securities Transactions	214		(379)
Loans Originated and Held-for-Sale	Loans Originated and Held-for-Sale	(626)		(45,930)		Loans Originated and Held-for-Sale	491		(626)
Proceeds from the Sale of Loans Held-for-Sale	Proceeds from the Sale of Loans Held-for-Sale	1,377		57,097		Proceeds from the Sale of Loans Held-for-Sale	25		1,377
Net Gain on the Sale of Loans	Net Gain on the Sale of Loans	(80)		(2,251)		Net Gain on the Sale of Loans	(25)		(80)
Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	136		68		Net Loss on the Sale of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	135		136
Contributions to Retirement Benefit Plans	Contributions to Retirement Benefit Plans	(478)		(441)		Contributions to Retirement Benefit Plans	(400)		(478)
Deferred Income Tax Benefit	Deferred Income Tax Benefit	(670)		(35)		Deferred Income Tax Benefit	—		(670)
Shares Issued Under the Directors’ Stock Plan	Shares Issued Under the Directors’ Stock Plan	285		284		Shares Issued Under the Directors’ Stock Plan	114		285
Stock-Based Compensation Expense	Stock-Based Compensation Expense	338		310		Stock-Based Compensation Expense	517		338
Tax Benefit from Exercise of Stock Options	Tax Benefit from Exercise of Stock Options	22		69		Tax Benefit from Exercise of Stock Options	11		22
Net Increase in Other Assets		(1,076)		(92)
Net Increase in Other Liabilities		3,415		1,727
Net Decrease in Other Assets						Net Decrease in Other Assets	(1,338)		(1,076)
Net Decrease in Other Liabilities						Net Decrease in Other Liabilities	6,985		3,415
Net Cash Provided By Operating Activities	Net Cash Provided By Operating Activities	48,210		55,712		Net Cash Provided By Operating Activities	36,899		48,210
Cash Flows from Investing Activities:	Cash Flows from Investing Activities:					Cash Flows from Investing Activities:

Proceeds from the Maturities and Calls of Securities Available-for-Sale	Proceeds from the Maturities and Calls of Securities Available-for-Sale	61,620		93,332		Proceeds from the Maturities and Calls of Securities Available-for-Sale	48,499		61,620
Purchases of Securities Available-for-Sale	Purchases of Securities Available-for-Sale	(149,674)		(222,089)		Purchases of Securities Available-for-Sale	—		(149,674)

Proceeds from the Maturities and Calls of Securities Held-to-Maturity	Proceeds from the Maturities and Calls of Securities Held-to-Maturity	24,231		24,266		Proceeds from the Maturities and Calls of Securities Held-to-Maturity	41,919		24,231
Purchases of Securities Held-to-Maturity	Purchases of Securities Held-to-Maturity	(10,293)		(4,695)		Purchases of Securities Held-to-Maturity	(7,490)		(10,293)

Net Increase in Loans	Net Increase in Loans	(260,179)		(70,393)		Net Increase in Loans	(159,518)		(260,179)
Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	1,055		1,054		Proceeds from the Sales of Premises and Equipment, Other Real Estate Owned and Repossessed Assets	1,978		1,055
Purchase of Premises and Equipment	Purchase of Premises and Equipment	(10,913)		(3,942)		Purchase of Premises and Equipment	(6,474)		(10,913)

Net Decrease (Increase) in FHLB and Federal Reserve Bank Stock		660		(31)

Net Decrease in FHLB and Federal Reserve Bank Stock						Net Decrease in FHLB and Federal Reserve Bank Stock	954		660
Purchase of Bank Owned Life Insurance						Purchase of Bank Owned Life Insurance	(692)		—
Net Cash Used By Investing Activities	Net Cash Used By Investing Activities	(343,493)		(182,498)		Net Cash Used By Investing Activities	(80,824)		(343,493)
Cash Flows from Financing Activities:	Cash Flows from Financing Activities:					Cash Flows from Financing Activities:
Net Increase in Deposits	Net Increase in Deposits	244,608		370,837		Net Increase in Deposits	168,121		244,608

Net Decrease in Short-Term Borrowings		—		(15,060)

Finance Lease Payments	Finance Lease Payments	(38)		(36)		Finance Lease Payments	(39)		(38)

Repayments of Federal Home Loan Bank Term Advances		(20,000)		—
Other Borrowings - Advances						Other Borrowings - Advances	256,500		—
Other Borrowings - Paydowns						Other Borrowings - Paydowns	(137,000)		(20,000)
Purchase of Treasury Stock	Purchase of Treasury Stock	(2,721)		(2,633)		Purchase of Treasury Stock	(848)		(2,721)
Stock Options Exercised, Net	Stock Options Exercised, Net	366		1,453		Stock Options Exercised, Net	83		366
Shares Issued Under the Employee Stock Purchase Plan	Shares Issued Under the Employee Stock Purchase Plan	361		363		Shares Issued Under the Employee Stock Purchase Plan	120		361

Shares Issued for Dividend Reinvestment Plans	Shares Issued for Dividend Reinvestment Plans	1,420		1,366		Shares Issued for Dividend Reinvestment Plans	472		1,420

Cash Dividends Paid	Cash Dividends Paid	(12,980)		(12,129)		Cash Dividends Paid	(13,405)		(12,980)
Net Cash Provided By Financing Activities	Net Cash Provided By Financing Activities	211,016		344,161		Net Cash Provided By Financing Activities	274,004		211,016
Net (Decrease) Increase in Cash and Cash Equivalents		(84,267)		217,375
Net Increase (Decrease) in Cash and Cash Equivalents						Net Increase (Decrease) in Cash and Cash Equivalents	230,079		(84,267)
Cash and Cash Equivalents at Beginning of Period	Cash and Cash Equivalents at Beginning of Period	457,696		380,991		Cash and Cash Equivalents at Beginning of Period	64,660		457,696
Cash and Cash Equivalents at End of Period	Cash and Cash Equivalents at End of Period	$	373,429	$	598,366	Cash and Cash Equivalents at End of Period	$	294,739	$	373,429

Supplemental Disclosures to Statements of Cash Flow Information:	Supplemental Disclosures to Statements of Cash Flow Information:					Supplemental Disclosures to Statements of Cash Flow Information:
Interest on Deposits and Borrowings	Interest on Deposits and Borrowings	$	5,911	$	4,224	Interest on Deposits and Borrowings	$	31,976	$	5,911
Income Taxes	Income Taxes	8,918		11,060		Income Taxes	5,819		8,918

Transfer of Loans to Other Real Estate Owned and Repossessed Assets	Transfer of Loans to Other Real Estate Owned and Repossessed Assets	1,217		1,066		Transfer of Loans to Other Real Estate Owned and Repossessed Assets	1,921		1,217

See Notes to Unaudited Interim Consolidated Financial Statements.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1.RISKS AND UNCERTAINTIES

Nature of Operations - Arrow Financial Corporation, a New York corporation ("Arrow," the "Company," "we," or "us"), was incorporated on March 21, 1983 and is registered as a bank holding company within the meaning of the Bank Holding Company Act of 1956. The banking subsidiaries are Glens Falls National Bank and Trust Company ("GFNB") whose main office is located in Glens Falls, New York, and Saratoga National Bank and Trust Company ("SNB") whose main office is located in Saratoga Springs, New York. The two subsidiary banks provide a full range of services to individuals and small to mid-size businesses in northeastern New York State from Albany, the State's capitol, to the Canadian border. Both banks have wealth management departments which provide investment management and administrative services. An active subsidiary of GFNB is Upstate Agency LLC, offering insurance services including property and casualty insurance, group health insurance and individual life insurance products. North Country Investment Advisers, Inc., a registered investment adviser that provides investment advice to our proprietary mutual fund, and Arrow Properties, Inc., a real estate investment trust (REIT), are subsidiaries of GFNB. Arrow also owns directly two subsidiary business trusts, organized in 2003 and 2004 to issue trust preferred securities (TRUPs), which are still outstanding.

Concentrations of Credit - With the exception of some indirect auto lending, Arrow's loans are primarily with borrowers in upstate New York. Although the loan portfolios of the subsidiary banks are well diversified, tourism has a substantial impact on the northeastern New York economy. The commitments to extend credit are fairly consistent with the distribution of loans presented in Note 5, "Loans," generally have the same credit risk and are subject to normal credit policies. Generally, the loans are secured by assets and are expected to be repaid from cash flow or the sale of selected assets of the borrowers. Arrow evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Arrow upon extension of credit, is based upon Management's credit evaluation of the counterparty. The nature of the collateral varies with the type of loan and may include: residential real estate, cash and securities, inventory, accounts receivable, property, plant and equipment, income producing commercial properties and automobiles.

Liquidity - The objective of effective liquidity management is to ensure that Arrow has the ability to raise cash when needed at a reasonable cost. This includes the capability of meeting expected and unexpected obligations to Arrow's customers at any time. Given the uncertain nature of customer demands and the need to maximize earnings, Arrow must have available reasonably priced sources of funds, both on- and off-balance sheet, that can be accessed quickly in times of need. Arrow’s liquidity position should provide the Company with the necessary flexibility to address any unexpected near-term disruptions such as reduced cash flows from the investment and loan portfolio, unexpected deposit runoff, or increased loan originations.

Arrow's primary sources of available liquidity are overnight investments in federal funds sold, interest-bearing bank balances at the Federal Reserve Bank of New York, advances from the Federal Reserve Bank of New York Bank Term Funding Program ("BTFP") and cash flow from investment securities and loans.

Note 2. ACCOUNTING POLICIES

In the opinion of the management of Arrow, ~~Financial Corporation (Arrow, the Company, we, or us),~~ the accompanying unaudited interim consolidated financial statements contain all of the adjustments necessary to present fairly the financial position as of September 30, ~~2022,~~2023, December 31, ~~2021~~2022 and September 30, ~~2021;~~2022; the results of operations for the three and nine month periods ended September 30, ~~2022~~2023 and ~~2021;~~2022; the consolidated statements of comprehensive income for the three and nine month periods ended September 30, ~~2022~~2023 and ~~2021;~~2022; the changes in stockholders' equity for the three and nine month periods ended September 30, ~~2022~~2023 and ~~2021;~~2022; and the cash flows for the nine month periods ended September 30, ~~2022~~2023 and ~~2021.~~2022. All such adjustments are of a normal recurring nature. The unaudited interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements of Arrow for the year ended December 31, ~~2021~~2022 included in Arrow's Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022 (the "2022 Form 10-K").

Management’s Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Management utilized estimates and assumptions in its evaluation of potential impairment of Arrow's right-of-use lease assets, goodwill and intangible assets. Our most significant estimate is the allowance for credit losses. Other estimates include the fair value of financial ~~statements,~~instruments, evaluation of pension and other post-retirement liabilities, an analysis of a need for a valuation allowance for deferred tax assets and a reserve for unfunded loan commitments recorded as an other liability. Actual results could differ from those estimates.

A material estimate that is particularly susceptible to significant change in the near term is the allowance for credit losses. In connection with the determination of the allowance for credit losses management obtains economic forecasts from reliable sources and appraisals for properties. The allowance for credit losses is management’s best estimate of the life of loan losses as of the balance sheet date. While management uses available information to recognize losses on loans, future adjustments to the allowance for credit losses may be necessary based on changes in economic conditions.

Allowance for Credit Losses – Loans - Accounting Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (CECL) approach requires an estimate of the credit losses expected over the life of a loan (or pool of loans). It replaces the incurred loss approach’s threshold that required the recognition of a

credit loss when it was probable that a loss event was incurred. The allowance for credit losses is a valuation account that is deducted from, or added to, the loans’ amortized cost basis to present the net lifetime amount expected to be collected on the loans. Credit losses are charged off against the allowance when management believes a loan balance is confirmed to be uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off.

Management estimates the allowance using relevant available information from internal and external sources related to past events, current conditions, and a reasonable and supportable single economic forecast. Historical credit loss experience provides the basis for the estimation of expected credit losses. Arrow's historical loss experience was supplemented with peer information when there was insufficient loss data for Arrow. Peer selection was based on a review of institutions with comparable loss experience as well as loan yield, bank size, portfolio concentration and geography. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in credit concentrations, delinquency level, collateral values and underwriting standards as well as changes in economic conditions or other relevant factors. Management judgment is required at each point in the measurement process.

Portfolio segment is defined as the level at which an entity develops and documents a systematic methodology to determine its allowance for credit losses. Upon adoption of CECL, management revised the manner in which loans were pooled for similar risk characteristics. Management developed portfolio segments for estimating loss based on type of borrower and collateral as follows:

Commercial Loans

Commercial Real Estate Loans

Consumer Loans

Residential Loans

Further details related to loan portfolio segments is included in Note 45 Loans.

Historical credit loss experience for both Arrow and segment-specific peers provides the basis for the estimation of expected credit losses. Arrow utilized regression analyses of peer data, of which Arrow is included, where observed credit losses and selected economic factors were utilized to determine suitable loss drivers for modeling lifetime probability of default (PD) rates. Arrow uses the discounted cash flow (DCF) method to estimate expected credit losses for the commercial, commercial real estate, and residential segments. For each of these loan segments, Arrow generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, PD, and segment-specific loss given default (LGD) risk factors. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical internal data and adjusted, if necessary, based on the reasonable and supportable forecast of economic conditions.

For the loan segments utilizing the DCF method, (commercial, commercial real estate, and residential) management utilizes externally developed economic forecast of the following economic factors as loss drivers: national unemployment, gross domestic

product and ~~home price index (HPI)~~Case-Shiller U.S. National Home Price Index ("HPI"). The economic forecast is applied over a reasonable and supportable forecast period. Arrow utilizes a six quarter reasonable and supportable forecast period with an eight quarter reversion to the historic mean on a straight-line basis.

The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value (NPV) of expected cash ~~flows (NPV).~~flows. An allowance for credit loss is established for the difference between the instrument’s NPV and amortized cost basis. The contractual term excludes expected extensions, renewals, and modifications unless either of the following applies: management has a reasonable expectation at the reporting date that a troubled debt restructuring (TDR) will be executed with an individual borrower or the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancellable by Arrow.

Arrow uses the vintage analysis method to estimate expected credit losses for the consumer loan segment. The vintage method was selected since the loans within the consumer loan segment are homogeneous, not just by risk characteristic, but by loan structure. Under the vintage analysis method, a loss rate is calculated based on the quarterly net charge-offs to the outstanding loan balance for each vintage year over the lookback period. Once this periodic loss rate is calculated for each quarter in the lookback period, the periodic rates are averaged into the loss rate. The loss rate is then applied to the outstanding loan balances based on the loan's vintage year. Arrow maintains, over the life of the loan, the loss curve by vintage year. If estimated losses computed by the vintage method need to be adjusted based on current conditions and the reasonable and supportable economic forecast, these adjustments would be incorporated over a six quarter reasonable and supportable forecast period, reverting to historical losses using a straight-line method over an eight quarter period. Based on current conditions and the reasonable and supportable economic forecast, no adjustment to the loss rate for each vintage is currently required.

The vintage and DCF models also consider the need to qualitatively adjust expected loss estimates for information not already captured in the quantitative loss estimation process. Qualitative considerations include limitations inherent in the quantitative model; trends experienced in nonperforming and delinquent loans; changes in value of underlying collateral; changes in lending policies and procedures; nature and composition of loans; portfolio concentrations that may affect loss experience across one or more components or the portfolio; the experience, ability and depth of lending management and staff; Arrow's credit review system; and the effect of external factors such as competition, legal and regulatory requirements. These qualitative factor adjustments may increase or decrease Arrow's estimate of expected credit losses so that the allowance for credit loss is reflective of the estimate of lifetime losses that exist in the loan portfolio at the balance sheet date.

All loans not included in the vintage analysis method that exceed $250,000 which are on nonaccrual, are evaluated on an individual basis. For collateral dependent financial assets where Arrow has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and Arrow expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, Arrow has elected a practical expedient to measure the allowance for credit loss as the difference

between the fair value of the collateral less cost to sell, and the amortized cost basis of the asset as of the measurement date. In the event ~~where~~ the repayment of a collateral dependent financial asset is expected to be provided substantially through the operating of the collateral, Arrow will use fair value of the collateral at the reporting date when recording the net carrying amount of the asset and determining the allowance for credit losses. When repayment is expected to be from the sale of the collateral, expected credit losses are calculated as the amount by which the amortized cost basis of the financial asset exceeds the fair value of the underlying collateral less estimated cost to sell. The allowance for credit losses may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

~~Except~~ASU No. 2022-02, “Troubled Debt Restructurings and Vintage Disclosures” (“ASU 2022-02”), was issued in March 2022 to provide updates on the accounting treatment for TDRs and related disclosures requirements, as ~~set forth below,~~well as modifying the disclosure requirement associated with the existing credit quality indicators “vintage” disclosure. With respect to TDRs, ASU 2022-02 eliminates the recognition and measurement guidance for TDRs under current GAAP and instead requires that Arrow evaluate whether the modification represents a new loan ~~that has been modified~~ or ~~renewed is considered~~ a ~~TDR when two conditions are met:~~

•~~The borrower is~~continuation of an existing loan, consistent with the current GAAP treatment for other loan modifications. In addition, ASU 2022-02 eliminates existing disclosure requirements on TDRs and replaces with enhanced disclosure requirements related to certain loan modifications made to borrowers experiencing financial ~~difficulty,~~difficulty. ASU 2022-02 also provides an update to the existing credit quality indicators “vintage” tabular disclosure requiring current period gross write-offs to be disclosed by year of origination for each loan segment. The provisions of ASU 2022-02 were effective January 1, 2023 and

•~~Concessions are made for~~ Arrow adopted the ~~borrower's benefit that would not otherwise be considered for~~provisions on a ~~borrower or transaction with similar credit risk characteristics.~~

Arrow's allowance for credit losses reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. Arrow has determined that a TDR is reasonably expected no later than the point it is determined that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession to avoid a default. Reasonably expectedprospective basis. Historical disclosures on TDRs ~~and executed non-performing TDRs are evaluated individually to determine the required allowance for credit losses. TDRs performing~~were removed from this report in accordance with ~~their modified contractual terms for~~the provisions of this ASU. The adoption of this ASU did not have a ~~reasonable period of time may be included in Arrow's existing pools based~~material impact on the ~~underlying risk characteristics of the loan to measure the allowance for credit losses.~~consolidated financial statements.

Estimated Credit Losses on Off-Balance Sheet Credit Exposures Recognized as Other Liabilities - Arrow estimates expected credit losses over the contractual period in which Arrow has exposure to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by Arrow. The allowance for credit losses on off-balance sheet credit exposures recognized in other liabilities, is adjusted as an expense in other ~~noninterest~~non-interest expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. Estimating credit losses on unfunded commitments requires ~~the Bank~~Arrow to consider the following categories of off-balance sheet credit exposure: unfunded commitments to extend credit, unfunded lines of credit, and standby letters of credit. Each of these unfunded commitments is then analyzed for a probability of funding to calculate a probable funding amount. The life of loan loss factor by related portfolio segment from the loan allowance for credit loss calculation is then applied to the probable funding amount to calculate the estimated credit losses on off-balance sheet credit exposures recognized as other liabilities.

Accrued Interest Receivable - Upon adoption of CECL on January 1, 2021, Arrow made the following elections regarding accrued interest receivable: (1) presented accrued interest receivable balances separately within the other assets balance sheet line item; (2) excluded interest receivable that is included in amortized cost of financing receivables from related disclosures requirements and (3) continued its policy to write off accrued interest receivable by reversing interest income. For loans, write off typically occurs upon

becoming over 90 to 120 days past due and therefore the amount of such write offs are immaterial. Historically, Arrow has not experienced uncollectible accrued interest receivable on investment securities.

Allowance for Credit Losses – Held-to-Maturity (HTM) Debt Securities - Arrow's HTM debt securities are also required to utilize the CECL approach to estimate expected credit losses. Management measures expected credit losses on HTM debt securities on a collective basis by major security types that share similar risk characteristics, such as financial asset type and collateral type adjusted for current conditions and reasonable and supportable forecasts. Management classifies the HTM portfolio into the following major security types: U.S. government agency or U.S. government sponsored mortgage-backed and collateralized mortgage obligations securities, and state and municipal debt securities.

The mortgage-backed and collateralized mortgage obligations HTM securities are issued by U.S. government entities and agencies. These securities are either explicitly or implicitly guaranteed by the U.S. government as to timely repayment of principal and interest, are highly rated by major rating agencies, and have a long history of no credit losses. Therefore, Arrow did not record a credit loss for these securities.

State and municipal bonds carry an investment grade from an accredited ratings agency, primarily with an investment grade rating. In addition, Arrow has a limited amount of New York state local municipal bonds that are not rated. The estimate of expected credit losses on the HTM portfolio is based on the expected cash flows of each individual CUSIP over its contractual life and utilized a municipal loss forecast model for determining PD and LGD rates. Management may exercise discretion to make adjustments based on environmental factors. A calculated expected credit loss for individual securities was determined using the PD and LGD rates. Arrow determined that the expected credit loss on its municipal bond portfolio was de minimis, and therefore, an allowance for credit losses was not recorded.

Allowance for Credit Losses – Available-for-Sale (AFS) Debt Securities - The impairment model for AFS debt securities differs from the CECL approach utilized by HTM debt securities since AFS debt securities are measured at fair value rather than amortized cost. For AFS debt securities in an unrealized loss position, ~~the Bank~~Arrow first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, in making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, adverse conditions specifically related to the security, failure of the issuer of the debt security to make scheduled interest or principal payments, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. The cash flows are estimated using information relevant to the collectability of the security, including information about past events, current conditions and reasonable and supportable forecasts. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the

credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Investments in Federal Reserve Bank ("FRB") and Federal Home Loan Bank ~~(FHLB)~~("FHLB") stock are required for membership in those organizations and are carried at cost since there is no market value available. The FHLB New York ("FHLBNY") continues to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of ~~Federal Reserve Bank~~FRB and FHLB stock.

~~There were no additional accounting standards~~Cybersecurity Risk Management, Strategy, Governance and Incident Disclosure:

In July 2023, the SEC adopted amendments intended to enhance and standardize disclosures related to cybersecurity. The amendments will be effective December 18, 2023 and will require timely disclosure of material cybersecurity incidents and annual disclosures related to cybersecurity risk management, strategy, and governance. Under the new rules, a material cybersecurity incident will be required to be disclosed on a Form 8-K within four business days after the learning of a material incident. The SEC has defined a cybersecurity incident to mean “an unauthorized occurrence, or a series of related unauthorized occurrences, on or conducted through a registrant’s information systems that jeopardizes the confidentiality, integrity, or availability of a registrant’s information systems or any information residing therein.”

Risk management and strategy - Annually, Registrants will be required to describe the processes, if any, for assessing, identifying,and managing material risks from cybersecurity threats in sufficient detail for a reasonable investor to understand those processes.

The registrant must also describe whether and how any risks from cybersecurity threats, including as a result of any previous cybersecurity incidents, have materially affected or are reasonably likely to materially affect the ~~first nine months~~registrant, including its business strategy, results of ~~2022.~~operations, or financial condition.

Governance - Disclosure is required about management’s and the board of directors’ oversight of cybersecurity risk, including a description of the board of directors’ oversight of risks from cybersecurity threats and a description of management’s role in assessing and managing the registrant’s material risks from cybersecurity threats.

The annual disclosure requirements will be effective for the Company beginning with annual report for the year ending on December 31, 2023.

Note 2.3. CASH AND CASH EQUIVALENTS (In Thousands)


The following table is the schedule of Cash and Cash Equivalents at September 30, 2022, December 31, 2021 and September 30, 2021:
The following table is the schedule of Cash and Cash Equivalents at September 30, 2023, December 31, 2022 and September 30, 2022:								The following table is the schedule of Cash and Cash Equivalents at September 30, 2023, December 31, 2022 and September 30, 2022:
		September 30, 2022		December 31, 2021		September 30, 2021			September 30, 2023		December 31, 2022		September 30, 2022
Cash and Due From Banks	Cash and Due From Banks	$	44,872	$	26,978	$	49,430	Cash and Due From Banks	$	39,778	$	31,886	$	44,872
Interest-Bearing Deposits at Banks		328,557		430,718		548,936
Interest-bearing Deposits at Banks								Interest-bearing Deposits at Banks	254,961		32,774		328,557
Total Cash and Cash Equivalents	Total Cash and Cash Equivalents	$	373,429	457,696		598,366		Total Cash and Cash Equivalents	$	294,739	64,660		373,429

The increase in cash from December 31, 2022 to September 30, 2023 reflects the strategic enhancement of the Company's liquidity position in light of recent industry events. The decline in cash from September 30, 2022 to December 31, 2022 was primarily the result of record loan growth in 2022 and a decrease in deposits in the fourth quarter of 2022.

1112

Note 3.4. INVESTMENT SECURITIES (In Thousands)

The following table is the schedule of Available-For-Sale Securities at September 30, ~~2022,~~2023, December 31, ~~2021~~2022 and September 30, ~~2021:~~2022:

Available-For-Sale Securities
U.S. Government & Agency
Obligations State and
Municipal
Obligations Mortgage-
Backed
Securities Corporate
and Other
Debt
Securities Total
Available-
For-Sale
Securities
September 30, 2022
Available-For-Sale Securities,
  at Amortized Cost $ 180,000 $ 340 $ 465,485 $ 1,000 $ 646,825
Gross Unrealized Gains — — 3 — 3
Gross Unrealized Losses (16,035) — (55,539) (200) (71,774)
Available-For-Sale Securities,
  at Fair Value 163,965 340 409,949 800 575,054
Available-For-Sale Securities,
  Pledged as Collateral, at Fair
  Value 414,929
Maturities of Debt Securities,
  at Amortized Cost:
Within One Year $ 5,000 $ 20 $ 817 $ — $ 5,837
From 1 - 5 Years 175,000 — 254,104 — 429,104
From 5 - 10 Years — 320 210,564 1,000 211,884
Over 10 Years — — — — —
Maturities of Debt Securities,
  at Fair Value:
Within One Year $ 5,000 $ 20 $ 795 $ — $ 5,815
From 1 - 5 Years 158,965 — 232,760 — 391,725
From 5 - 10 Years — 320 176,394 800 177,514
Over 10 Years — — — — —
Securities in a Continuous
  Loss Position, at Fair Value:
Less than 12 Months $ 71,419 $ — $ 274,491 $ — $ 345,910
12 Months or Longer 92,545 — 135,329 800 228,674
Total $ 163,964 $ — $ 409,820 $ 800 $ 574,584
Number of Securities in a
  Continuous Loss Position 24 — 156 1 181
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
Less than 12 Months $ 3,581 $ — $ 30,521 $ — $ 34,102
12 Months or Longer 12,454 — 25,018 200 37,672
Total $ 16,035 $ — $ 55,539 $ 200 $ 71,774

Available-For-Sale Securities
U.S. Government & Agency
Obligations State and
Municipal
Obligations Mortgage-
Backed
Securities Corporate
and Other
Debt
Securities Total
Available-
For-Sale
Securities
Disaggregated Details:
US Treasury Obligations,
  at Amortized Cost $ —
US Treasury Obligations,
  at Fair Value —
US Agency Obligations,
  at Amortized Cost $ 180,000
US Agency Obligations,
  at Fair Value 163,965
US Government Agency
  Securities, at Amortized Cost $ 8,243
US Government Agency
  Securities, at Fair Value 7,842
Government Sponsored Entity
  Securities, at Amortized Cost 457,242
Government Sponsored Entity
  Securities, at Fair Value 402,107
December 31, 2021
Available-For-Sale Securities,
  at Amortized Cost $ 110,000 $ 400 $ 448,742 $ 1,000 $ 560,142
Gross Unrealized Gains 63 — 3,617 — 3,680
Gross Unrealized Losses (1,698) — (2,608) (200) (4,506)
Available-For-Sale Securities,
  at Fair Value 108,365 400 449,751 800 559,316
Available-For-Sale Securities,
  Pledged as Collateral,
  at Fair Value 298,106
Securities in a Continuous
  Loss Position, at Fair Value:
Less than 12 Months $ 74,088 $ — $ 263,292 $ — $ 337,380
12 Months or Longer 29,214 — — 800 30,014
Total $ 103,302 $ — $ 263,292 $ 800 $ 367,394
Number of Securities in a
  Continuous Loss Position 14 — 39 1 54
Unrealized Losses on
  Securities in a Continuous
  Loss Position:
Less than 12 Months $ 912 $ — $ 2,608 $ — $ 3,520
12 Months or Longer 786 — — 200 986
Total $ 1,698 $ — $ 2,608 $ 200 $ 4,506
Disaggregated Details:
US Agency Obligations,
  at Amortized Cost $ 110,000
US Agency Obligations,
  at Fair Value 108,365
US Government Agency
  Securities, at Amortized Cost $ 9,386
US Government Agency
  Securities, at Fair Value 9,371
Government Sponsored Entity
  Securities, at Amortized Cost 439,356
Government Sponsored Entity
  Securities, at Fair Value 440,380


Available-For-Sale Securities
	U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Available- For-Sale Securities
September 30, 2023
Available-For-Sale Securities, at Amortized Cost	$	190,000	$	280	$	398,323	$	1,000	$	589,603
Gross Unrealized Gains	—		—		1		—		1
Gross Unrealized Losses	(13,579)		—		(56,585)		(200)		(70,364)
Available-For-Sale Securities, at Fair Value	176,421		280		341,739		800		519,240
Available-For-Sale Securities, Pledged as Collateral, at Fair Value									390,923

Maturities of Debt Securities, at Amortized Cost:
Within One Year	$	15,000	$	—	$	586	$	—	$	15,586
From 1 - 5 Years	175,000		—		215,671		—		390,671
From 5 - 10 Years	—		280		182,066		1,000		183,346
Over 10 Years	—		—		—		—		—

Maturities of Debt Securities, at Fair Value:
Within One Year	$	14,736	$	—	$	569	$	—	$	15,305
From 1 - 5 Years	161,685		—		193,699		—		355,384
From 5 - 10 Years	—		280		147,471		800		148,551
Over 10 Years	—		—		—		—		—

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	14,914	$	—	$	11,262	$	—	$	26,176
12 Months or Longer	161,506		—		330,190		800		492,496
Total	$	176,420	$	—	$	341,452	$	800	$	518,672
Number of Securities in a Continuous Loss Position	25		—		154		1		180

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	86	$	—	$	317	$	—	$	403
12 Months or Longer	13,493		—		56,268		200		69,961
Total	$	13,579	$	—	$	56,585	$	200	$	70,364


Available-For-Sale Securities	Available-For-Sale Securities									Available-For-Sale Securities
		U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities			Total Available- For-Sale Securities			U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Available- For-Sale Securities
September 30, 2021
Disaggregated Details:													Disaggregated Details:
US Agency Obligations, at Amortized Cost													US Agency Obligations, at Amortized Cost	$	190,000
US Agency Obligations, at Fair Value													US Agency Obligations, at Fair Value	176,421
Local Municipal Obligations, at Amortized Cost													Local Municipal Obligations, at Amortized Cost			$	280
Local Municipal Obligations, at Fair Value													Local Municipal Obligations, at Fair Value			280
US Government Agency Securities, at Amortized Cost													US Government Agency Securities, at Amortized Cost					$	7,416
US Government Agency Securities, at Fair Value													US Government Agency Securities, at Fair Value					6,885
Government Sponsored Entity Securities, at Amortized Cost													Government Sponsored Entity Securities, at Amortized Cost					390,907
Government Sponsored Entity Securities, at Fair Value													Government Sponsored Entity Securities, at Fair Value					334,854
Corporate Trust Preferred Securities, at Amortized Cost													Corporate Trust Preferred Securities, at Amortized Cost							$	1,000
Corporate Trust Preferred Securities, at Fair Value													Corporate Trust Preferred Securities, at Fair Value							800

December 31, 2022													December 31, 2022
Available-For-Sale Securities, at Amortized Cost	Available-For-Sale Securities, at Amortized Cost	$	110,001	$	400	$	373,042	$	1,000		$	484,443	Available-For-Sale Securities, at Amortized Cost	$	190,000	$	340	$	447,755	$	1,000	$	639,095
Gross Unrealized Gains	Gross Unrealized Gains	96		—		5,225		—			5,321		Gross Unrealized Gains	15		—		65		—		80
Gross Unrealized Losses	Gross Unrealized Losses	(792)		—		(1,872)		(200)			(2,864)		Gross Unrealized Losses	(14,816)		—		(50,664)		(200)		(65,680)
Available-For-Sale Securities, at Fair Value	Available-For-Sale Securities, at Fair Value	109,305		400		376,395		800			486,900		Available-For-Sale Securities, at Fair Value	175,199		340		397,156		800		573,495
Available-For-Sale Securities, Pledged as Collateral, at Fair Value	Available-For-Sale Securities, Pledged as Collateral, at Fair Value										361,014		Available-For-Sale Securities, Pledged as Collateral, at Fair Value									308,266

Securities in a Continuous Loss Position, at Fair Value:	Securities in a Continuous Loss Position, at Fair Value:												Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	Less than 12 Months	$	74,695	$	—	$	190,532	$	—		$	265,227	Less than 12 Months	$	66,690	$	—	$	183,868	$	—	$	250,558
12 Months or Longer	12 Months or Longer	29,513		—		—		800			30,313		12 Months or Longer	93,493		—		199,262		800		293,555
Total	Total	$	104,208	$	—	$	190,532	$	800		$	295,540	Total	$	160,183	$	—	$	383,130	$	800	$	544,113
Number of Securities in a Continuous Loss Position	Number of Securities in a Continuous Loss Position	14		—		27		1			42		Number of Securities in a Continuous Loss Position	23		—		150		1		174

Unrealized Losses on Securities in a Continuous Loss Position:	Unrealized Losses on Securities in a Continuous Loss Position:												Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	Less than 12 Months	$	305	$	—	$	1,872	$	—		$	2,177	Less than 12 Months	$	3,310	$	—	$	18,756	$	—	$	22,066
12 Months or Longer	12 Months or Longer	487		—		—		200			687		12 Months or Longer	11,506		—		31,908		200		43,614
Total	Total	$	792	$	—	$	1,872	$	200		$	2,864	Total	$	14,816	$	—	$	50,664	$	200	$	65,680

Disaggregated Details:	Disaggregated Details:												Disaggregated Details:

US Agency Obligations, at Amortized Cost	US Agency Obligations, at Amortized Cost	$	110,001										US Agency Obligations, at Amortized Cost	$	190,000
US Agency Obligations, at Fair Value	US Agency Obligations, at Fair Value	109,305											US Agency Obligations, at Fair Value	175,199
Local Municipal Obligations, at Amortized Cost													Local Municipal Obligations, at Amortized Cost			$	340
Local Municipal Obligations, at Fair Value													Local Municipal Obligations, at Fair Value			340
US Government Agency Securities, at Amortized Cost	US Government Agency Securities, at Amortized Cost					$	10,119						US Government Agency Securities, at Amortized Cost					$	7,934
US Government Agency Securities, at Fair Value						10,165
Government Sponsored Entity Securities, at Amortized Cost						362,923
Government Sponsored Entity Securities, at Fair Value						366,230


Available-For-Sale Securities
	U.S. Government & Agency Obligations		State and Municipal Obligations		Mortgage- Backed Securities		Corporate and Other Debt Securities		Total Available- For-Sale Securities
US Government Agency Securities, at Fair Value					7,433
Government Sponsored Entity Securities, at Amortized Cost					439,821
Government Sponsored Entity Securities, at Fair Value					389,723
Corporate Trust Preferred Securities, at Amortized Cost							$	1,000
Corporate Trust Preferred Securities, at Fair Value							800



September 30, 2022
Available-For-Sale Securities, at Amortized Cost	$	180,000	$	340	$	465,485	$	1,000	$	646,825
Gross Unrealized Gains	—		—		3		—		3
Gross Unrealized Losses	(16,035)		—		(55,539)		(200)		(71,774)
Available-For-Sale Securities, at Fair Value	163,965		340		409,949		800		575,054
Available-For-Sale Securities, Pledged as Collateral, at Fair Value									414,929

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	71,419	$	—	$	274,491	$	—	$	345,910
12 Months or Longer	92,545		—		135,329		800		228,674
Total	$	163,964	$	—	$	409,820	$	800	$	574,584
Number of Securities in a Continuous Loss Position	24		—		156		1		181

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	3,581	$	—	$	30,521	$	—	$	34,102
12 Months or Longer	12,454		—		25,018		200		37,672
Total	$	16,035	$	—	$	55,539	$	200	$	71,774

Disaggregated Details:


US Agency Obligations, at Amortized Cost	$	180,000
US Agency Obligations, at Fair Value	163,965
Local Municipal Obligations, at Amortized Cost			$	340
Local Municipal Obligations, at Fair Value			340
US Government Agency Securities, at Amortized Cost					$	8,243
US Government Agency Securities, at Fair Value					7,842
Government Sponsored Entity Securities, at Amortized Cost					457,242
Government Sponsored Entity Securities, at Fair Value					402,107
Corporate Trust Preferred Securities, at Amortized Cost							$	1,000
Corporate Trust Preferred Securities, at Fair Value							800

At September 30, ~~2022,~~2023, there was no allowance for credit losses for the AFS debt securities portfolio.

The following table is the schedule of Held-To-Maturity Securities at September 30, ~~2022,~~2023, December 31, ~~2021~~2022 and September 30, ~~2021:~~2022:

Held-To-Maturity Securities
State and
Municipal
Obligations Mortgage-
Backed
Securities Total
Held-To
Maturity
Securities
September 30, 2022
Held-To-Maturity Securities,
  at Amortized Cost $ 169,619 $ 12,559 $ 182,178
Gross Unrealized Gains 1 — 1
Gross Unrealized Losses (5,771) (608) (6,379)
Held-To-Maturity Securities,
  at Fair Value 163,849 11,951 175,800
Held-To-Maturity Securities,
  Pledged as Collateral, at Fair Value 153,364

Held-To-Maturity Securities
State and
Municipal
Obligations Mortgage-
Backed
Securities Total
Held-To
Maturity
Securities
Maturities of Debt Securities,
  at Amortized Cost:
Within One Year $ 50,423 $ — $ 50,423
From 1 - 5 Years 115,113 12,559 127,672
From 5 - 10 Years 4,044 — 4,044
Over 10 Years 39 — 39
Maturities of Debt Securities,
  at Fair Value:
Within One Year $ 50,058 $ — $ 50,058
From 1 - 5 Years 109,945 11,951 121,896
From 5 - 10 Years 3,807 — 3,807
Over 10 Years 39 — 39
Securities in a Continuous
  Loss Position, at Fair Value:
Less than 12 Months $ 141,132 $ 11,951 $ 153,083
12 Months or Longer — — —
Total $ 141,132 $ 11,951 $ 153,083
Number of Securities in a
  Continuous Loss Position 419 16 435
Unrealized Losses on Securities
   in a Continuous Loss Position:
Less than 12 Months $ 5,771 $ 608 $ 6,379
12 Months or Longer — — —
Total $ 5,771 $ 608 $ 6,379
Disaggregated Details:
US Government Agency
  Securities, at Amortized Cost $ 4,115
US Government Agency
  Securities, at Fair Value 3,924
Government Sponsored Entity
  Securities, at Amortized Cost 8,444
Government Sponsored Entity
  Securities, at Fair Value 8,027


Held-To-Maturity Securities	Held-To-Maturity Securities					Held-To-Maturity Securities
		State and Municipal Obligations		Mortgage- Backed Securities			Total Held-To Maturity Securities			State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
December 31, 2021
September 30, 2023									September 30, 2023
Held-To-Maturity Securities, at Amortized Cost	Held-To-Maturity Securities, at Amortized Cost	$	180,195	$	16,371		$	196,566	Held-To-Maturity Securities, at Amortized Cost	$	131,017	$	9,560	$	140,577
Gross Unrealized Gains	Gross Unrealized Gains	4,179		547			4,726		Gross Unrealized Gains	—		—		—
Gross Unrealized Losses	Gross Unrealized Losses	—		—			—		Gross Unrealized Losses	(5,204)		(562)		(5,766)
Held-To-Maturity Securities, at Fair Value	Held-To-Maturity Securities, at Fair Value	184,374		16,918			201,292		Held-To-Maturity Securities, at Fair Value	125,813		8,998		134,811
Held-To-Maturity Securities, Pledged as Collateral, at Carrying Value									Held-To-Maturity Securities, Pledged as Collateral, at Carrying Value					117,723
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value	Held-To-Maturity Securities, Pledged as Collateral, at Fair Value						175,218		Held-To-Maturity Securities, Pledged as Collateral, at Fair Value					111,957

Maturities of Debt Securities, at Amortized Cost:									Maturities of Debt Securities, at Amortized Cost:
Within One Year									Within One Year	$	56,686	$	—	$	56,686
From 1 - 5 Years									From 1 - 5 Years	71,994		9,560		81,554
From 5 - 10 Years									From 5 - 10 Years	2,308		—		2,308
Over 10 Years									Over 10 Years	29		—		29

Maturities of Debt Securities, at Fair Value:									Maturities of Debt Securities, at Fair Value:
Within One Year									Within One Year	$	55,883	$	—	$	55,883
From 1 - 5 Years									From 1 - 5 Years	67,716		8,998		76,714
From 5 - 10 Years									From 5 - 10 Years	2,185		—		2,185
Over 10 Years									Over 10 Years	29		—		29

Securities in a Continuous Loss Position, at Fair Value:	Securities in a Continuous Loss Position, at Fair Value:								Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	Less than 12 Months	$	—	$	—		$	—	Less than 12 Months	$	1,575	$	—	$	1,575
12 Months or Longer	12 Months or Longer	—		—			—		12 Months or Longer	108,092		8,998		117,090
Total	Total	$	—	$	—		$	—	Total	$	109,667	$	8,998	$	118,665

Number of Securities in a Continuous Loss Position	Number of Securities in a Continuous Loss Position	—		—			—		Number of Securities in a Continuous Loss Position	339		16		355

Unrealized Losses on Securities in a Continuous Loss Position:	Unrealized Losses on Securities in a Continuous Loss Position:								Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	Less than 12 Months	$	—	$	—		$	—	Less than 12 Months	$	86	$	—	$	86
12 Months or Longer	12 Months or Longer	—		—			—		12 Months or Longer	5,118		562		5,680
Total	Total	$	—	$	—		$	—	Total	$	5,204	$	562	$	5,766

Disaggregated Details:	Disaggregated Details:								Disaggregated Details:
Municipal Obligations, at Amortized Cost									Municipal Obligations, at Amortized Cost	$	131,017
Municipal Obligations, at Fair Value									Municipal Obligations, at Fair Value	125,813
US Government Agency Securities, at Amortized Cost	US Government Agency Securities, at Amortized Cost			$	5,518				US Government Agency Securities, at Amortized Cost			$	3,292
US Government Agency Securities, at Fair Value	US Government Agency Securities, at Fair Value			5,647					US Government Agency Securities, at Fair Value			3,075
Government Sponsored Entity Securities, at Amortized Cost				10,853
Government Sponsored Entity Securities, at Fair Value				11,271


Held-To-Maturity Securities	Held-To-Maturity Securities					Held-To-Maturity Securities
		State and Municipal Obligations		Mortgage- Backed Securities			Total Held-To Maturity Securities			State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
September 30, 2021
Government Sponsored Entity Securities, at Amortized Cost									Government Sponsored Entity Securities, at Amortized Cost			6,268
Government Sponsored Entity Securities, at Fair Value									Government Sponsored Entity Securities, at Fair Value			5,923

December 31, 2022									December 31, 2022
Held-To-Maturity Securities, at Amortized Cost	Held-To-Maturity Securities, at Amortized Cost	$	179,952	$	18,385		$	198,337	Held-To-Maturity Securities, at Amortized Cost	$	163,600	$	11,764	$	175,364
Gross Unrealized Gains	Gross Unrealized Gains	4,834		765			5,599		Gross Unrealized Gains	1		—		1
Gross Unrealized Losses	Gross Unrealized Losses	—		—			—		Gross Unrealized Losses	(3,131)		(611)		(3,742)
Held-To-Maturity Securities, at Fair Value	Held-To-Maturity Securities, at Fair Value	184,786		19,150			203,936		Held-To-Maturity Securities, at Fair Value	160,470		11,153		171,623
Held-To-Maturity Securities, Pledged as Collateral, at Carrying Value									Held-To-Maturity Securities, Pledged as Collateral, at Carrying Value					146,722
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value	Held-To-Maturity Securities, Pledged as Collateral, at Fair Value						192,929		Held-To-Maturity Securities, Pledged as Collateral, at Fair Value					142,982

Securities in a Continuous Loss Position, at Fair Value:	Securities in a Continuous Loss Position, at Fair Value:								Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	Less than 12 Months	$	—	$	—		$	—	Less than 12 Months	$	137,773	$	11,153	$	148,926
12 Months or Longer	12 Months or Longer	—		—			—		12 Months or Longer	—		—		—
Total	Total	$	—	$	—		$	—	Total	$	137,773	$	11,153	$	148,926
Number of Securities in a Continuous Loss Position	Number of Securities in a Continuous Loss Position	—		—			—		Number of Securities in a Continuous Loss Position	397		16		413

Unrealized Losses on Securities in a Continuous Loss Position:	Unrealized Losses on Securities in a Continuous Loss Position:								Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	Less than 12 Months	$	—	$	—		$	—	Less than 12 Months	$	3,131	$	611	$	3,742
12 Months or Longer	12 Months or Longer	—		—			—		12 Months or Longer	—		—		—
Total	Total	$	—	$	—		$	—	Total	$	3,131	$	611	$	3,742

September 30, 2021
Disaggregated Details:	Disaggregated Details:								Disaggregated Details:
US Government Agency Securities, at Amortized Cost				$	6,302
US Government Agency Securities, at Fair Value				6,506
Government Sponsored Entity Securities, at Amortized Cost				12,083
Government Sponsored Entity Securities, at Fair Value				12,644
Municipal Obligations, at Amortized Cost									Municipal Obligations, at Amortized Cost	$	163,600


Held-To-Maturity Securities
	State and Municipal Obligations		Mortgage- Backed Securities		Total Held-To Maturity Securities
Municipal Obligations, at Fair Value	160,470
US Government Agency Securities, at Amortized Cost			$	3,898
US Government Agency Securities, at Fair Value			3,687
Government Sponsored Entity Securities, at Amortized Cost			7,866
Government Sponsored Entity Securities, at Fair Value			7,466

September 30, 2022
Held-To-Maturity Securities, at Amortized Cost	$	169,619	$	12,559	$	182,178
Gross Unrealized Gains	1		—		1
Gross Unrealized Losses	(5,771)		(608)		(6,379)
Held-To-Maturity Securities, at Fair Value	163,849		11,951		175,800
Held-To-Maturity Securities, Pledged as Collateral, at Carrying Value					159,742
Held-To-Maturity Securities, Pledged as Collateral, at Fair Value					153,364

Securities in a Continuous Loss Position, at Fair Value:
Less than 12 Months	$	141,132	$	11,951	$	153,083
12 Months or Longer	—		—		—
Total	$	141,132	$	11,951	$	153,083
Number of Securities in a Continuous Loss Position	419		16		435

Unrealized Losses on Securities in a Continuous Loss Position:
Less than 12 Months	$	5,771	$	608	$	6,379
12 Months or Longer	—		—		—
Total	$	5,771	$	608	$	6,379

September 30, 2022
Disaggregated Details:
Municipal Obligations, at Amortized Cost	$	169,619
Municipal Obligations, at Fair Value	163,849
US Government Agency Securities, at Amortized Cost			$	4,115
US Government Agency Securities, at Fair Value			3,924
Government Sponsored Entity Securities, at Amortized Cost			8,444
Government Sponsored Entity Securities, at Fair Value			8,027

In the tables above, maturities of mortgage-backed securities are included based on their ~~expected average~~contractual lives. Actual maturities will differ because issuers may have the right to call or prepay obligations with or without prepayment penalties.

Arrow's investment policy requires that investments held in our portfolio be investment grade or better at the time of purchase. Arrow performs an analysis of the creditworthiness of municipal obligations to determine if a security is of investment grade. The analysis may include but may not solely rely upon credit analysis conducted by external credit rating agencies.

Arrow evaluates AFS debt securities in unrealized loss positions at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit-related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized within the allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. Arrow determined that at September 30, ~~2022,~~2023, gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. Arrow does not intend to sell, nor is it more likely than not that Arrow will be required to sell ~~the security~~any securities before recovery of its amortized cost basis, which may be at maturity. Therefore, Arrow carried no allowance for credit loss at September 30, ~~2022~~2023 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during the three months ended September 30, ~~2022.~~2023.

Arrow's ~~held to maturity~~HTM debt securities are comprised of U.S. government-sponsored enterprises (GSEs) or state and municipal obligations. GSE securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Arrow performs an analysis of the credit worthiness of municipal obligations to determine if a security is of investment grade. The analysis may include but may not solely rely upon credit analysis conducted by external credit rating agencies. Arrow determined that the expected credit loss on its ~~held to maturity~~HTM debt portfolio was immaterial and therefore no allowance for credit loss was recorded as of September 30, ~~2022.~~2023.

1719

The following table is the schedule of Equity Securities at September 30, ~~2022,~~2023, December 31, ~~2021~~2022 and September 30, ~~2021:~~2022:

Equity Securities

September 30, 2022

December 31, 2021

September 30, 2021

September 30, 2023

December 31, 2022

September 30, 2022

Equity Securities, at Fair Value

$2,126

$1,747

$1,886

Equity Securities, at Fair Value

$1,960

$2,174

$2,126

The following is a summary of realized and unrealized gains and losses recognized in net income on equity securities during the three and nine month periods ended September 30, ~~2022~~2023 and ~~2021:~~2022:

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
Net Gain on Equity Securities $ 95 $ (106) $ 379 $ 250
Less: Net gain recognized during the reporting period on equity securities sold during the period — — — —
Unrealized net gain recognized during the reporting period on equity securities still held at the reporting date $ 95 $ (106) $ 379 $ 250


	For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2023		2022		2023		2022
Net (Loss) Gain on Equity Securities	$	71	$	95	$	(214)	$	379
Less: Net gain recognized during the reporting period on equity securities sold during the period	—		—		—		—
Unrealized net (loss) gain recognized during the reporting period on equity securities still held at the reporting date	$	71	$	95	$	(214)	$	379

1820

Note 4.5. LOANS (In Thousands)

Loan Categories and Past Due Loans

The following two tables present loan balances outstanding as of September 30, ~~2022~~2023 and an analysis of the recorded investment in loans that are past due at these dates. Generally, Arrow considers a loan past due 30 or more days when the borrower is two payments past due. Loans held-for-sale of ~~$483, $1,154~~$165, $656 and ~~$2,169~~$483 as of September 30, ~~2022,~~2023, December 31, ~~2021~~2022 and September 30, ~~2021,~~2022, respectively, are included in the residential real estate balances for current loans.


Schedule of Past Due Loans by Loan Category	Schedule of Past Due Loans by Loan Category											Schedule of Past Due Loans by Loan Category
				Commercial											Commercial
													Commercial		Real Estate		Consumer		Residential		Total
September 30, 2023												September 30, 2023
Loans Past Due 30-59 Days												Loans Past Due 30-59 Days	$	247	$	13,787	$	11,864	$	1,692	$	27,590
Loans Past Due 60-89 Days												Loans Past Due 60-89 Days	59		1,977		4,953		18		7,007
Loans Past Due 90 or more Days												Loans Past Due 90 or more Days	3		—		1,504		3,271		4,778
Total Loans Past Due												Total Loans Past Due	309		15,764		18,321		4,981		39,375
Current Loans												Current Loans	147,757		718,840		1,089,316		1,143,329		3,099,242
Total Loans												Total Loans	$	148,066	$	734,604	$	1,107,637	$	1,148,310	$	3,138,617

December 31, 2022												December 31, 2022
Loans Past Due 30-59 Days												Loans Past Due 30-59 Days	$	48	$	370	$	13,657	$	1,833	$	15,908
Loans Past Due 60-89 Days												Loans Past Due 60-89 Days	33		—		4,517		112		4,662
Loans Past Due 90 or more Days												Loans Past Due 90 or more Days	44		—		3,503		4,790		8,337
Total Loans Past Due												Total Loans Past Due	125		370		21,677		6,735		28,907
Current Loans												Current Loans	140,168		706,652		1,043,458		1,064,022		2,954,300
Total Loans												Total Loans	$	140,293	$	707,022	$	1,065,135	$	1,070,757	$	2,983,207
		Commercial		Real Estate		Consumer		Residential		Total
September 30, 2022	September 30, 2022											September 30, 2022
Loans Past Due 30-59 Days	Loans Past Due 30-59 Days	$	86	$	—	$	8,870	$	393	$	9,349	Loans Past Due 30-59 Days	$	86	$	—	$	8,870	$	393	$	9,349
Loans Past Due 60-89 Days	Loans Past Due 60-89 Days	80		—		4,397		1,266		5,743		Loans Past Due 60-89 Days	80		—		4,397		1,266		5,743
Loans Past Due 90 or more Days	Loans Past Due 90 or more Days	—		235		1,708		3,487		5,430		Loans Past Due 90 or more Days	—		235		1,708		3,487		5,430
Total Loans Past Due	Total Loans Past Due	166		235		14,975		5,146		20,522		Total Loans Past Due	166		235		14,975		5,146		20,522
Current Loans	Current Loans	138,807		678,982		1,040,610		1,045,873		2,904,272		Current Loans	138,807		678,982		1,040,610		1,045,873		2,904,272
Total Loans	Total Loans	$	138,973	$	679,217	$	1,055,585	$	1,051,019	$	2,924,794	Total Loans	$	138,973	$	679,217	$	1,055,585	$	1,051,019	$	2,924,794

December 31, 2021
Loans Past Due 30-59 Days		$	202	$	—	$	6,713	$	107	$	7,022
Loans Past Due 60-89 Days		3		—		2,709		2,557		5,269
Loans Past Due 90 or more Days		157		1,180		1,564		1,981		4,882
Total Loans Past Due		362		1,180		10,986		4,645		17,173
Current Loans		172,156		627,749		909,570		941,293		2,650,768
Total Loans		$	172,518	$	628,929	$	920,556	$	945,938	$	2,667,941

September 30, 2021
Loans Past Due 30-59 Days		$	729	$	—	$	4,809	$	368	$	5,906
Loans Past Due 60-89 Days		63		—		2,543		1,295		3,901
Loans Past Due 90 or more Days		75		1,641		1,010		1,951		4,677
Total Loans Past Due		867		1,641		8,362		3,614		14,484
Current Loans		187,324		613,440		912,827		926,676		2,640,267
Total Loans		$	188,191	$	615,081	$	921,189	$	930,290	$	2,654,751

Schedule of Non Accrual Loans by Category
Commercial
September 30, 2022 Commercial Real Estate Consumer Residential Total
Loans 90 or More Days Past Due
  and Still Accruing Interest $ — $ — $ — $ 514 $ 514
Nonaccrual Loans 9 3,401 1,708 3,694 8,812
Nonaccrual With No Allowance for Credit Loss 9 3,401 1,708 3,694 8,812
Interest Income on Nonaccrual Loans — — — 12 12
December 31, 2021
Loans 90 or More Days Past Due
  and Still Accruing Interest $ 157 $ — $ — $ 666 $ 823
Nonaccrual Loans 34 7,243 1,697 1,790 10,764
September 30, 2021
Loans 90 or More Days Past Due
  and Still Accruing Interest $ — $ — $ — $ 555 $ 555
Nonaccrual Loans 91 7,766 1,101 1,765 10,723
The increase in loans past due 30-59 days within Commercial Real Estate is primarily attributable to one commercial loan relationship. The Company is actively working with the borrower to allow the borrower to stabilize the property’s cash flow. The property's collateral value exceeds the loan exposure.


Schedule of Non Accrual Loans by Category
			Commercial
September 30, 2023	Commercial		Real Estate		Consumer		Residential		Total
Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	251	$	251
Nonaccrual Loans	3		—		1,572		4,448		6,023
Nonaccrual With No Allowance for Credit Loss	3		—		1,572		4,448		6,023
Interest Income on Nonaccrual Loans	—		—		—		—		—

December 31, 2022
Loans 90 or More Days Past Due and Still Accruing Interest	$	44	$	—	$	—	$	1,113	$	1,157
Nonaccrual Loans	8		3,110		3,503		4,136		10,757

September 30, 2022
Loans 90 or More Days Past Due and Still Accruing Interest	$	—	$	—	$	—	$	514	$	514
Nonaccrual Loans	9		3,401		1,708		3,694		8,812

1921

Arrow disaggregates its loan portfolio into the following four categories:

Commercial - Arrow offers a variety of loan options to meet the specific needs of our commercial customers including term loans, time notes and lines of credit. Such loans are made available to businesses for working capital needs such as inventory and receivables, business expansion and equipment purchases. Generally, a collateral lien is placed on equipment or other assets owned by the borrower. Generally, these loans carry a higher risk than commercial real estate loans due to the nature of the underlying collateral, which can be business assets such as equipment and accounts receivable and generally have a lower liquidation value than real estate. In the event of default by the borrower, Arrow may be required to liquidate collateral at deeply discounted values. To reduce the risk, management usually obtains personal guarantees to support the borrowing, as permitted by applicable law.

Commercial Real Estate - Arrow offers commercial real estate loans to finance real estate purchases, refinancings, expansions and improvements to commercial properties. Commercial real estate loans are made to finance the purchases of real property which generally consists of real estate with completed structures. These commercial real estate loans are typically secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities, and both owner- and non-owner-occupied facilities. These loans are typically less risky than commercial loans, since they are secured by real estate and buildings, and are generally originated in amounts of no more than 80% of the appraised value of the property. However, Arrow also offers commercial construction and land development loans to finance projects. Many projects will ultimately be used by the borrowers' businesses, while others are developed for resale. These real estate loans are also typically secured by first liens on the real estate, which may include apartments, commercial structures, housing businesses, healthcare facilities and both owner-occupied and non-owner-occupied facilities. There is enhanced risk during the construction period, since the loan is secured by an incomplete project.

Consumer Loans - This category is primarily comprised of automobile loans. Arrow primarily finances the purchases of automobiles indirectly through dealer relationships located throughout upstate New York and Vermont. Most automobile loans carry a fixed rate of interest with principal repayment terms typically ranging from three to seven years. Automobile loans are underwritten on a secured basis using the underlying collateral being financed. Arrow also offers a variety of consumer installment loans to finance personal expenditures. Most of these loans carry a fixed rate of interest with principal repayment terms typically ranging from one to five years, based upon the nature of the collateral and the size of the loan. In addition to installment loans, Arrow also offers personal lines of credit and overdraft protection. Several of these consumer loans are unsecured, which carry a higher risk of loss.

Residential - Residential real estate loans consist primarily of loans secured by first or second mortgages on primary residences. Arrow originates fixed-rate and adjustable-rate one-to-four-family residential real estate loans for the construction, purchase of real estate or refinancing of an existing mortgage. These loans are collateralized primarily by owner-occupied properties generally located in Arrow's market area. Loans on one-to-four-family residential real estate are generally originated in amounts of no more than 80% of the purchase price or appraised value (whichever is lower), or have private mortgage insurance. Arrow’s underwriting analysis for residential mortgage loans typically includes credit verification, independent appraisals, and a review of the borrower’s financial condition. Mortgage title insurance and hazard insurance are normally required. It is Arrow's general practice to underwrite residential real estate loans to secondary market standards. Construction loans have a unique risk, because they are secured by an incomplete dwelling. This risk is reduced through periodic site inspections, including one at each loan draw period. In addition, Arrow offers fixed home equity loans, as well as home equity lines of credit to consumers to finance home improvements, debt consolidation, education and other uses. Arrow's policy allows for a maximum loan to value ratio of 80%, although periodically higher advances are allowed. Arrow originates home equity lines of credit and second mortgage loans (loans secured by a second junior lien position on one-to-four-family residential real estate). Risk is generally reduced through underwriting criteria, which include credit verification, appraisals, a review of the borrower's financial condition, and personal cash flows. A security interest, with title insurance when necessary, is taken in the underlying real estate.

Allowance for Credit Losses

Loan segments were selected by class code and application code to ensure each segment is comprised of loans with homogenous loan characteristics and similar risk profiles. The resulting loan segments are commercial, ~~Paycheck Protection Program (PPP), commercial non-PPP,~~ commercial real estate, consumer and residential real estate loans. The consumer segment is mainly comprised of automobile loans, and since they are relatively short-term in nature, with similar dollar amounts and collateral, the vintage analysis method was selected to determine the credit loss reserve. The vintage method utilizes Arrow loan data exclusively as the method calculates a loss rate based on the total origination balance of the loans by year and the charge-off and recovery rate of the same origination year. Arrow maintains, over the life of the loan, the loss curve by vintage year. The discounted cash flow method (DCF) is used to calculate the reserve for credit losses for the commercial, commercial real estate and residential real estate segments.

The September 30, ~~2022~~2023 allowance for credit losses calculation incorporated a reasonable and supportable forecast period to account for economic conditions utilized in the measurement. The quantitative model utilized an economic forecast sourced from reputable third-parties that reflects the economic conditions with ~~a deterioration of approximately 0.45%~~an improvement in the national unemployment rate of approximately 0.33% during the six-quarter forecast period, while forecasted gross domestic product ~~are~~ projected ~~to decline~~an improvement of approximately ~~1.00%~~0.42%. The home price index (HPI) forecast declined approximately ~~4.63%~~1.6% from the previous quarter level. The recent volatility of the national HPI forecast in projecting growth and decline is beyond any recent actual change when compared to the Albany Metropolitan Statistical Area for the last 10 years and is considered to be a unique circumstance not reflective of current economic conditions in our markets. As a result, an additional qualitative adjustment was utilized during 2022 to address risk outside of the quantitative model. Key assumptions utilized in the CECL calculation include loan segmentation, loan loss regression analysis, reasonable and supportable forecast period,

reversion period, discounted cash flow inputs including economic forecast data and prepayment and curtailment speeds and qualitative factors. Key assumptions are reviewed and approved on a quarterly basis. There ~~was one~~were no assumption ~~change~~changes for the third quarter calculation. ~~Demand loans, which do not have a maturity date, now utilize a 1-year maturity as the loans are reviewed annually. The loans previously utilized a 10-year maturity.~~ Driven by current economic forecasts, loan growth and net charge offs during the quarter, the third quarter provision for credit losses

was ~~$1.7 million.~~$354 thousand. The provision is directionally consistent with both the latest economic forecasts as well as third quarter activity. Management's evaluation considers the allowance for credit losses for loans to be appropriate as of September 30, ~~2022.~~2023.

The following table details activity in the allowance for credit losses on loans for the three and nine months ended September 30, ~~2022~~2023 and September 30, ~~2021:~~2022:


Allowance for Credit Losses	Allowance for Credit Losses									Allowance for Credit Losses
		Commercial		Commercial Real Estate		Consumer		Residential			Total

June 30, 2022		$	2,465	$	13,936	$	2,358	$	9,331		$	28,090
Rollforward of the Allowance for Credit Losses for the Quarterly Period:													Rollforward of the Allowance for Credit Losses for the Quarterly Period:	Commercial		Commercial Real Estate		Consumer		Residential		Total
Rollforward of the Allowance for Credit Losses for the Quarterly Period:													Rollforward of the Allowance for Credit Losses for the Quarterly Period:
June 30, 2023													June 30, 2023	$	1,972	$	15,697	$	2,646	$	10,855	$	31,170

Charge-offs	Charge-offs	(44)		—		(1,103)		—			(1,147)		Charge-offs	—		—		(1,204)		—		(1,204)
Recoveries	Recoveries	—		—		574		—			574		Recoveries	—		—		792		—		792
Provision	Provision	(416)		930		692		509			1,715		Provision	(139)		(114)		301		306		354
September 30, 2023													September 30, 2023	$	1,833	$	15,583	$	2,535	$	11,161	$	31,112

December 31, 2022													December 31, 2022	$	1,961	$	15,213	$	2,585	$	10,193	$	29,952
Charge-offs													Charge-offs	$	—	$	—	$	(3,806)	$	(6)	$	(3,812)
Recoveries													Recoveries	$	—	$	—	$	2,116	$	—	$	2,116
Provision													Provision	$	(128)	$	370	$	1,640	$	974	$	2,856
September 30, 2023													September 30, 2023	$	1,833	$	15,583	$	2,535	$	11,161	$	31,112

June 30, 2022													June 30, 2022	$	2,465	$	13,936	$	2,358	$	9,331	$	28,090
Charge-offs													Charge-offs	(44)		—		(1,103)		—		(1,147)
Recoveries													Recoveries	—		—		574		—		574
Provision													Provision	(416)		930		692		509		1,715
September 30, 2022	September 30, 2022	$	2,005	$	14,866	$	2,521	$	9,840		$	29,232	September 30, 2022	$	2,005	$	14,866	$	2,521	$	9,840	$	29,232

December 31, 2021	December 31, 2021	$	2,298	$	13,136	$	2,402	$	9,445		$	27,281	December 31, 2021	$	2,298	$	13,136	$	2,402	$	9,445	$	27,281
Charge-offs	Charge-offs	$	(48)	$	—	$	(2,805)	$	(30)		$	(2,883)	Charge-offs	$	(48)	$	—	$	(2,805)	$	(30)	$	(2,883)
Recoveries	Recoveries	$	26	$	—	$	1,419	$	—		$	1,445	Recoveries	$	26	$	—	$	1,419	$	—	$	1,445
Provision	Provision	$	(271)	$	1,730	$	1,505	$	425		$	3,389	Provision	$	(271)	$	1,730	$	1,505	$	425	$	3,389
September 30, 2022	September 30, 2022	$	2,005	$	14,866	$	2,521	$	9,840		$	29,232	September 30, 2022	$	2,005	$	14,866	$	2,521	$	9,840	$	29,232

June 30, 2021		$	2,241	$	13,606	$	2,443	$	8,720		$	27,010
Charge-offs		(17)		—		(427)		—			$	(444)
Recoveries		—		—		291		—			$	291
Provision		200		65		(19)		(147)			$	99
September 30, 2021		$	2,424	$	13,671	$	2,288	$	8,573		$	26,956

Balance as of January 1, 2021 as adjusted for ASU 2016-13		$	4,257	$	12,054	$	2,179	$	9,442		$	27,932
Charge-offs		(37)		—		(1,480)		(3)			(1,520)
Recoveries		—		—		830		—			830
Provision		(1,796)		1,617		759		(866)			(286)
September 30, 2021		$	2,424	$	13,671	$	2,288	$	8,573		$	26,956

Estimated Credit Losses on Off-Balance Sheet Credit Exposures Recognized as Other Liabilities

Financial instrument credit losses apply to off-balance sheet credit exposures such as unfunded loan commitments and standby letters of credit. A liability for expected credit losses for off-balance sheet exposures is recognized if the entity has a present contractual obligation to extend the credit and the obligation is not unconditionally cancellable by the entity. Changes in this allowance are reflected in other operating expenses within the non-interest expense category. As of September 30, ~~2022,~~2023, the total unfunded commitment off-balance sheet credit exposure was ~~$1.6~~$1.7 million.

Individually Evaluated Loans

All loans not included in the vintage analysis method that exceed $250,000, which are on nonaccrual status, are evaluated on an individual basis. Arrow made the policy election to apply a practical expedient for collateral dependent financial assets when the borrower is experiencing financial difficulty and the repayment is expected through the sale of the collateral. This allows Arrow to use fair value of the collateral at the reporting date adjusted for estimated cost to sell when recording the net carrying amount of the asset and determining the allowance for credit losses for a financial asset. In the event where the repayment of a collateral dependent financial asset is expected to be provided substantially through the operating of the collateral, Arrow will use fair value of the collateral at the reporting date when recording the net carrying amount of the asset and determining the allowance for credit losses. As of September 30, ~~2022,~~2023, there were four total relationships identified to be evaluated for loss on an individual basis which had an amortized cost basis of ~~$4.7~~$1.9 million and none had an allowance for credit loss.

2123

The following tables present the amortized cost basis of collateral-dependent loans by class of loans as of September 30, ~~2022,~~2023, December 31, ~~2021~~2022 and September 30, ~~2021:~~2022:


September 30, 2022		Collateral Type -Residential Real Estate		Collateral Type - Commercial Real Estate		Total Loans
September 30, 2023								September 30, 2023	Collateral Type -Residential Real Estate		Collateral Type - Commercial Real Estate		Total Loans
Commercial	Commercial	$	—	$	—	$	—	Commercial	$	—	$	—	$	—
Commercial Real Estate	Commercial Real Estate	—		3,166		3,166		Commercial Real Estate	—		—		—
Consumer	Consumer	—		—		—		Consumer	—		—		—
Residential	Residential	1,494		—		1,494		Residential	1,949		—		1,949
Total	Total	$	1,494	$	3,166	$	4,660	Total	$	1,949	$	—	$	1,949


December 31, 2021		Collateral Type -Residential Real Estate		Collateral Type - Commercial Real Estate		Total Loans
December 31, 2022								December 31, 2022	Collateral Type -Residential Real Estate		Collateral Type - Commercial Real Estate		Total Loans
Commercial	Commercial	$	—	$	—	$	—	Commercial	$	—	$	—	$	—
Commercial Real Estate	Commercial Real Estate	—		6,732		6,732		Commercial Real Estate	—		3,110		3,110
Consumer	Consumer	—		—		—		Consumer	—		—		—
Residential	Residential	673		—		673		Residential	1,963		—		1,963
Total	Total	$	673	$	6,732	$	7,405	Total	$	1,963	$	3,110	$	5,073


September 30, 2021		Collateral Type -Residential Real Estate		Collateral Type - Commercial Real Estate		Total Loans
September 30, 2022								September 30, 2022	Collateral Type -Residential Real Estate		Collateral Type - Commercial Real Estate		Total Loans
Commercial	Commercial	$	—	$	—	$	—	Commercial	$	—	$	—	$	—
Commercial Real Estate	Commercial Real Estate	—		7,254		7,254		Commercial Real Estate	—		3,166		3,166
Consumer	Consumer	—		—		—		Consumer	—		—		—
Residential	Residential	676		—		676		Residential	1,494		—		1,494
Total	Total	$	676	$	7,254	$	7,930	Total	$	1,494	$	3,166	$	4,660


Allowance for Credit Losses - Collectively and Individually Evaluated	Allowance for Credit Losses - Collectively and Individually Evaluated									Allowance for Credit Losses - Collectively and Individually Evaluated
		Commercial		Commercial Real Estate		Consumer		Residential			Total			Commercial		Commercial Real Estate		Consumer		Residential		Total
September 30, 2022
September 30, 2023													September 30, 2023
Ending Loan Balance - Collectively Evaluated	Ending Loan Balance - Collectively Evaluated	$	138,973	$	676,051	$	1,055,585	$	1,049,525		$	2,920,134	Ending Loan Balance - Collectively Evaluated	$	148,066	$	734,604	$	1,107,637	$	1,146,361	$	3,136,668
Allowance for Credit Losses - Loans Collectively Evaluated	Allowance for Credit Losses - Loans Collectively Evaluated	2,005		14,866		2,521		9,840			29,232		Allowance for Credit Losses - Loans Collectively Evaluated	1,833		15,583		2,535		11,161		31,112

Ending Loan Balance - Individually Evaluated	Ending Loan Balance - Individually Evaluated	—		3,166		—		1,494			4,660		Ending Loan Balance - Individually Evaluated	—		—		—		1,949		1,949
Allowance for Credit Losses - Loans Individually Evaluated	Allowance for Credit Losses - Loans Individually Evaluated	—		—		—		—			—		Allowance for Credit Losses - Loans Individually Evaluated	—		—		—		—		—

December 31, 2021
December 31, 2022													December 31, 2022
Ending Loan Balance - Collectively Evaluated	Ending Loan Balance - Collectively Evaluated	$	172,518	$	622,197	$	920,556	$	945,265		$	2,660,536	Ending Loan Balance - Collectively Evaluated	$	140,293	$	703,912	$	1,065,135	$	1,068,794	$	2,978,134
Allowance for Credit Losses - Loans Collectively Evaluated	Allowance for Credit Losses - Loans Collectively Evaluated	2,298		12,537		2,402		9,445			$	26,682	Allowance for Credit Losses - Loans Collectively Evaluated	1,961		15,213		2,585		10,193		$	29,952
Ending Loan Balance - Individually Evaluated	Ending Loan Balance - Individually Evaluated	—		6,732		—		673			7,405		Ending Loan Balance - Individually Evaluated	—		3,110		—		1,963		5,073
Allowance for Credit Losses - Loans Individually Evaluated	Allowance for Credit Losses - Loans Individually Evaluated	—		599		—		—			599		Allowance for Credit Losses - Loans Individually Evaluated	—		—		—		—		—

September 30, 2021
September 30, 2022													September 30, 2022
Ending Loan Balance - Collectively Evaluated	Ending Loan Balance - Collectively Evaluated	$	188,191	$	607,827	$	921,189	$	929,614		$	2,646,821	Ending Loan Balance - Collectively Evaluated	$	138,973	$	676,051	$	1,055,585	$	1,049,525	$	2,920,134
Allowance for Credit Losses - Loans Collectively Evaluated	Allowance for Credit Losses - Loans Collectively Evaluated	2,424		13,055		2,288		8,573			26,340		Allowance for Credit Losses - Loans Collectively Evaluated	2,005		14,866		2,521		9,840		29,232
Ending Loan Balance - Individually Evaluated	Ending Loan Balance - Individually Evaluated	—		7,254		—		676			7,930		Ending Loan Balance - Individually Evaluated	—		3,166		—		1,494		4,660
Allowance for Credit Losses - Loans Individually Evaluated	Allowance for Credit Losses - Loans Individually Evaluated	—		616		—		—			616		Allowance for Credit Losses - Loans Individually Evaluated	—		—		—		—		—

Through the provision for credit losses, an allowance for credit losses is maintained that reflects the best estimate of the calculated expected credit losses in Arrow's loan portfolio as of the balance sheet date. Additions are made to the allowance for credit losses through a periodic provision for credit losses. Actual credit losses are charged against the allowance for credit losses when loans are deemed uncollectible and recoveries of amounts previously charged off are recorded as credits to the allowance for credit losses.

Arrow's loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with certain criticized and classified commercial-related relationships. In addition, the independent internal loan review department performs periodic reviews of the credit quality indicators on individual loans in the commercial loan portfolio.

2224

Arrow considers the need to qualitatively adjust expected credit loss estimates for information not already captured in the loss estimation process. These qualitative factor adjustments may increase or decrease management’s estimate of expected credit losses. Adjustments are not made for information that has already been considered and included in the loss estimation process.

Arrow considers the qualitative factors that are relevant as of the reporting date, which may include, but are not limited to the following factors:

•The nature and volume of Arrow's financial assets;

•The existence, growth, and effect of any concentrations of credit;

•The volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans;

•The value of the underlying collateral for loans that are not collateral-dependent;

•Arrow's lending policies and procedures, including changes in underwriting standards and practices for collections, write-offs, and recoveries;

•The quality of Arrow's loan review function;

•The experience, ability, and depth of Arrow's lending, investment, collection, and other relevant management/staff;

•The effect of other external factors such as the regulatory, legal and technological environments; competition; and events such as natural disasters;

•Actual and expected changes in international, national, regional, and local economic and business conditions and developments in which the institution operates that affect the collectability of financial assets; and,

•Other qualitative factors not reflected in quantitative loss rate calculations.

2325

Loan Credit Quality Indicators and Modification

The Company adopted ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2022-02") effective January 1, 2023. ASU 2022-02 requires that entities disclose current-period gross charge-offs by year of origination for loans and leases, which has been incorporated in the credit quality table below. There was only one new immaterial TDR in the first quarter of 2022.

In the first nine months of 2023, approximately $1.5 million of residential real estate loans were modified The modifications were in the form of short-term forbearance of interest payments. The financial impact of the forbearance is less than ten thousand dollars per month of forgone interest income

The following tables present credit quality indicators by total loans amortized cost basis by origination year as of September 30, ~~2022,~~2023, December 31, ~~2021~~2022 and September 30, ~~2021:~~2022:


		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total			Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
September 30, 2022		2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total															Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
September 30, 2023																				September 30, 2023	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
Commercial:	Commercial:																			Commercial:													Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
Risk rating	Risk rating																			Risk rating
Satisfactory	Satisfactory	$	34,589	$	31,762	$	26,654	$	7,554	$	9,605	$	11,194	$	8,008	$	—	$	129,366	Satisfactory	$	37,300	$	36,456	$	23,602	$	10,622	$	4,799	$	21,459	$	10,328	$	—	$	144,566
Special mention	Special mention	—		—		—		—		—		35		35		—		70		Special mention	—		—		—		128		—		—		—		—		128
Substandard	Substandard	—		3,318		479		445		—		37		5,258		—		9,537		Substandard	—		—		—		—		26		3,245		101		—		3,372
Doubtful	Doubtful	—		—		—		—		—		—		—		—		—		Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Loans	Total Commercial Loans	$	34,589	$	35,080	$	27,133	$	7,999	$	9,605	$	11,266	$	13,301	$	—	$	138,973	Total Commercial Loans	$	37,300	$	36,456	$	23,602	$	10,750	$	4,825	$	24,704	$	10,429	$	—	$	148,066

Current-period gross charge-offs																				Current-period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—					$	—

Commercial Real Estate:	Commercial Real Estate:																			Commercial Real Estate:
Risk rating	Risk rating																			Risk rating
Satisfactory	Satisfactory	$	106,549	$	136,306	$	247,780	$	40,959	$	30,667	$	64,934	$	3,052	$	—	$	630,247	Satisfactory	$	57,761	$	157,741	$	106,128	$	121,968	$	41,827	$	184,590	$	2,035	$	—	$	672,050
Special mention	Special mention	9,801		—		2,973		—		4,315		1,425		—		—		18,514		Special mention	—		3,123		—		—		—		4,150		—		—		7,273
Substandard	Substandard	9,531		4,723		11,352		1,133		93		3,403		221		—		30,456		Substandard	—		9,299		1,685		2,590		797		40,411		499		—		55,281
Doubtful	Doubtful	—		—		—		—		—		—		—		—		—		Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Real Estate Loans	Total Commercial Real Estate Loans	$	125,881	$	141,029	$	262,105	$	42,092	$	35,075	$	69,762	$	3,273	$	—	$	679,217	Total Commercial Real Estate Loans	$	57,761	$	170,163	$	107,813	$	124,558	$	42,624	$	229,151	$	2,534	$	—	$	734,604

Current-period gross charge-offs																				Current-period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—					$	—

Consumer:	Consumer:																			Consumer:
Risk rating	Risk rating																			Risk rating
Performing	Performing	$	406,206	$	309,006	$	172,974	$	101,458	$	47,874	$	15,933	$	483	$	—	$	1,053,934	Performing	$	322,084	$	384,607	$	216,234	$	107,743	$	53,646	$	21,276	$	—	$	—	$	1,105,590
Nonperforming	Nonperforming	268		583		351		304		58		87		—		—		1,651		Nonperforming	109		625		562		192		68		33		458		—		2,047
Total Consumer Loans	Total Consumer Loans	$	406,474	$	309,589	$	173,325	$	101,762	$	47,932	$	16,020	$	483	$	—	$	1,055,585	Total Consumer Loans	$	322,193	$	385,232	$	216,796	$	107,935	$	53,714	$	21,309	$	458	$	—	$	1,107,637

Current-period gross charge-offs																				Current-period gross charge-offs	$	192	$	915	$	1,689	$	477	$	299	$	234					$	3,806

Residential:	Residential:																			Residential:
Risk rating	Risk rating																			Risk rating
Performing	Performing	$	163,702	$	209,408	$	173,435	$	84,370	$	61,907	$	232,021	$	122,191	$	—	$	1,047,034	Performing	$	106,267	$	235,027	$	191,780	$	118,517	$	76,518	$	305,076	$	108,098	$	—	$	1,141,283
Nonperforming	Nonperforming	—		257		939		28		318		2,268		175		—		3,985		Nonperforming	—		—		2,770		1,006		598		2,152		501		—		7,027
Total Residential Loans	Total Residential Loans	$	163,702	$	209,665	$	174,374	$	84,398	$	62,225	$	234,289	$	122,366	$	—	$	1,051,019	Total Residential Loans	$	106,267	$	235,027	$	194,550	$	119,523	$	77,116	$	307,228	$	108,599	$	—	$	1,148,310

Current-period gross charge-offs																				Current-period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	6					$	6

Total Loans	Total Loans	$	730,646	$	695,363	$	636,937	$	236,251	$	154,837	$	331,337	$	139,423	$	—	$	2,924,794	Total Loans	$	523,521	$	826,878	$	542,761	$	362,766	$	178,279	$	582,392	$	122,020	$	—	$	3,138,617


	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
December 31, 2022	2022		2021		2020		2019		2018		Prior
Commercial:
Risk rating
Satisfactory	$	42,038	$	28,718	$	16,870	$	7,857	$	8,129	$	20,379	$	8,909	$	—	$	132,900
Special mention	—		—		—		—		—		30		30		—		60
Substandard	—		—		255		478		—		3,464		3,136		—		7,333
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Loans	$	42,038	$	28,718	$	17,125	$	8,335	$	8,129	$	23,873	$	12,075	$	—	$	140,293

Commercial Real Estate:
Risk rating
Satisfactory	$	152,858	$	115,111	$	121,811	$	43,647	$	63,913	$	159,876	$	1,603	$	—	$	658,819
Special mention	9,678		—		—		—		789		241		—		—		10,708
Substandard	607		—		5,807		812		4,371		25,677		221		—		37,495
Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Real Estate Loans	$	163,143	$	115,111	$	127,618	$	44,459	$	69,073	$	185,794	$	1,824	$	—	$	707,022

Consumer:
Risk rating
Performing	$	482,530	$	284,831	$	154,819	$	88,165	$	38,852	$	12,032	$	504	$	—	$	1,061,733
Nonperforming	758		1,468		607		325		157		87		—		—		3,402
Total Consumer Loans	$	483,288	$	286,299	$	155,426	$	88,490	$	39,009	$	12,119	$	504	$	—	$	1,065,135

Residential:
Risk rating
Performing	$	210,565	$	198,195	$	128,372	$	82,965	$	74,281	$	259,787	$	111,563	$	—	$	1,065,728
Nonperforming	—		255		939		597		520		2,311		407		—		5,029
Total Residential Loans	$	210,565	$	198,450	$	129,311	$	83,562	$	74,801	$	262,098	$	111,970	$	—	$	1,070,757

Total Loans	$	899,034	$	628,578	$	429,480	$	224,846	$	191,012	$	483,884	$	126,373	$	—	$	2,983,207

2427

Term Loans Amortized Cost Basis by Origination Year Revolving Loans Amortized Cost Basis Revolving Loan Converted to Term Total
December 31, 2021 2021 2020 2019 2018 2017 Prior
Commercial:
Risk rating
Satisfactory $ 75,615 $ 35,522 $ 11,591 $ 11,661 $ 7,792 $ 3,442 $ 12,783 $ — $ 158,406
Special mention — — 3 — — 5,899 — — 5,902
Substandard 3,541 3,791 589 — 25 12 252 — 8,210
Doubtful — — — — — — — — —
Total Commercial Loans $ 79,156 $ 39,313 $ 12,183 $ 11,661 $ 7,817 $ 9,353 $ 13,035 $ — $ 172,518
Commercial Real Estate:
Risk rating
Satisfactory $ 140,636 $ 276,461 $ 42,369 $ 37,997 $ 22,155 $ 59,698 $ 1,923 $ — $ 581,239
Special mention — 7,893 1,204 — 137 1,906 — — 11,140
Substandard 7,248 16,405 3,910 96 — 8,867 24 — 36,550
Doubtful — — — — — — — — —
Total Commercial Real Estate Loans $ 147,884 $ 300,759 $ 47,483 $ 38,093 $ 22,292 $ 70,471 $ 1,947 $ — $ 628,929
Consumer:
Risk rating
Performing $ 402,558 $ 239,492 $ 154,517 $ 82,673 $ 29,587 $ 9,578 $ 455 $ — $ 918,860
Nonperforming 388 399 502 151 160 96 — — 1,696
Total Consumer Loans $ 402,946 $ 239,891 $ 155,019 $ 82,824 $ 29,747 $ 9,674 $ 455 $ — $ 920,556
Residential:
Risk rating
Performing $ 187,708 $ 146,113 $ 93,547 $ 88,505 $ 93,524 $ 215,679 $ 118,595 $ — $ 943,671
Nonperforming — 133 — 27 162 1,907 38 — 2,267
Total Residential Loans $ 187,708 $ 146,246 $ 93,547 $ 88,532 $ 93,686�� $ 217,586 $ 118,633 $ — $ 945,938
Total Loans $ 817,694 $ 726,209 $ 308,232 $ 221,110 $ 153,542 $ 307,084 $ 134,070 $ — $ 2,667,941


		Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total			Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
September 30, 2021		2021		2020		2019		2018		2017		Prior		Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total															Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
September 30, 2022																				September 30, 2022	2022		2021		2020		2019		2018		Prior		Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
Commercial:	Commercial:																			Commercial:													Revolving Loans Amortized Cost Basis		Revolving Loan Converted to Term		Total
Risk rating	Risk rating																			Risk rating
Satisfactory	Satisfactory	$	81,914	$	38,970	$	13,966	$	12,860	$	8,511	$	3,917	$	12,796	$	—	$	172,934	Satisfactory	$	34,589	$	31,762	$	26,654	$	7,554	$	9,605	$	11,194	$	8,008	$	—	$	129,366
Special mention	Special mention	—		652		51		—		—		5,499		—		—		6,202		Special mention	—		—		—		—		—		35		35		—		70
Substandard	Substandard	3,575		4,496		636		—		31		295		22		—		9,055		Substandard	—		3,318		479		445		—		37		5,258		—		9,537
Doubtful	Doubtful	—		—		—		—		—		—		—		—		—		Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Loans	Total Commercial Loans	$	85,489	$	44,118	$	14,653	$	12,860	$	8,542	$	9,711	$	12,818	$	—	$	188,191	Total Commercial Loans	$	34,589	$	35,080	$	27,133	$	7,999	$	9,605	$	11,266	$	13,301	$	—	$	138,973

Commercial Real Estate:	Commercial Real Estate:																			Commercial Real Estate:
Risk rating	Risk rating																			Risk rating
Satisfactory	Satisfactory	$	96,419	$	290,785	$	47,605	$	41,215	$	22,661	$	62,203	$	2,935	$	—	$	563,823	Satisfactory	$	106,549	$	136,306	$	247,780	$	40,959	$	30,667	$	64,934	$	3,052	$	—	$	630,247
Special mention	Special mention	—		16,829		1,227		—		139		1,976		—		—		20,171		Special mention	9,801		—		2,973		—		4,315		1,425		—		—		18,514
Substandard	Substandard	7,248		10,359		3,950		146		—		9,384		—		—		31,087		Substandard	9,531		4,723		11,352		1,133		93		3,403		221		—		30,456
Doubtful	Doubtful	—		—		—		—		—		—		—		—		—		Doubtful	—		—		—		—		—		—		—		—		—
Total Commercial Real Estate Loans	Total Commercial Real Estate Loans	$	103,667	$	317,973	$	52,782	$	41,361	$	22,800	$	73,563	$	2,935	$	—	$	615,081	Total Commercial Real Estate Loans	$	125,881	$	141,029	$	262,105	$	42,092	$	35,075	$	69,762	$	3,273	$	—	$	679,217

Consumer:	Consumer:																			Consumer:
Risk rating	Risk rating																			Risk rating
Performing	Performing	$	330,952	$	264,963	$	175,448	$	97,563	$	37,112	$	13,572	$	477	$	—	$	920,087	Performing	$	406,206	$	309,006	$	172,974	$	101,458	$	47,874	$	15,933	$	483	$	—	$	1,053,934
Nonperforming	Nonperforming	203		319		332		160		30		58		—		—		1,102		Nonperforming	268		583		351		304		58		87		—		—		1,651
Total Consumer Loans	Total Consumer Loans	$	331,155	$	265,282	$	175,780	$	97,723	$	37,142	$	13,630	$	477	$	—	$	921,189	Total Consumer Loans	$	406,474	$	309,589	$	173,325	$	101,762	$	47,932	$	16,020	$	483	$	—	$	1,055,585

Residential:	Residential:																			Residential:
Risk rating	Risk rating																			Risk rating
Performing	Performing	$	124,536	$	154,071	$	101,678	$	94,621	$	97,457	$	231,375	$	124,231	$	—	$	927,969	Performing	$	163,702	$	209,408	$	173,435	$	84,370	$	61,907	$	232,021	$	122,191	$	—	$	1,047,034
Nonperforming	Nonperforming	—		336		—		155		213		1,586		31		—		2,321		Nonperforming	—		257		939		28		318		2,268		175		—		3,985
Total Residential Loans	Total Residential Loans	$	124,536	$	154,407	$	101,678	$	94,776	$	97,670	$	232,961	$	124,262	$	—	$	930,290	Total Residential Loans	$	163,702	$	209,665	$	174,374	$	84,398	$	62,225	$	234,289	$	122,366	$	—	$	1,051,019

Total Loans	Total Loans	$	644,847	$	781,780	$	344,893	$	246,720	$	166,154	$	329,865	$	140,492	$	—	$	2,654,751	Total Loans	$	730,646	$	695,363	$	636,937	$	236,251	$	154,837	$	331,337	$	139,423	$	—	$	2,924,794

For the purposes of the table above, nonperforming consumer and residential loans were those loans on nonaccrual status or were 90 days or more past due and still accruing interest.

~~The~~As of September 30, 2023, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process is ~~$2.2~~$2.8 million.

For the allowance calculation, an internally developed system of five credit quality indicators is used to rate the credit worthiness of each commercial loan defined as follows:

1) Satisfactory - "Satisfactory" borrowers have acceptable financial condition with satisfactory record of earnings and sufficient historical and projected cash flow to service the debt. Borrowers have satisfactory repayment histories and primary and secondary sources of repayment can be clearly identified;

2) Special Mention - Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. "Special mention" assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Loans which might be assigned this credit quality indicator include loans to borrowers with deteriorating financial strength and/or earnings record and loans with potential for problems due to weakening economic or market conditions;

3) Substandard - Loans classified as “substandard” are inadequately protected by the current sound net worth or paying capacity of the borrower or the collateral pledged, if any. Loans in this category have well defined weaknesses that jeopardize the repayment. They are characterized by the distinct possibility that Arrow will sustain some loss if the deficiencies are not corrected. “Substandard” loans may include loans which are likely to require liquidation of collateral to effect repayment, and other loans where character or ability to repay has become suspect. Loss potential, while existing in the aggregate amount of substandard assets, does not have to exist in individual assets classified substandard;

4) Doubtful - Loans classified as “doubtful” have all of the weaknesses inherent in those classified as “substandard” with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of current existing facts, conditions, and values, highly questionable and improbable. Although possibility of loss is extremely high, classification of these loans as “loss” has been deferred due to specific pending factors or events which may strengthen the value (e.g. possibility of additional collateral, injection of

2628

capital, collateral liquidation, debt restructure, economic recovery, etc). Loans classified as “doubtful” need to be placed on non-accrual; and

5) Loss - Loans classified as “loss” are considered uncollectible with collateral of such little value that their continuance as bankable assets is not warranted. As of the date of the balance sheet, all loans in this category have been charged-off to the allowance for loan losses.

Commercial loans are generally evaluated on an annual basis depending on the size and complexity of the loan relationship, unless the credit related quality indicator falls to a level of "special mention" or below, when the loan is evaluated quarterly. The credit quality indicator is one of the factors used in assessing the level of incurred risk of loss in our commercial related loan portfolios.

~~Loans Modified~~

Note 6. DEBT (Dollars in ~~Trouble Debt Restructurings~~Thousands)

~~The following table presents information on loans modified in trouble debt restructurings during the periods indicated:~~Schedule of Borrowings:

~~Loans Modified in Trouble Debt Restructurings During the Period~~

~~Commercial~~

~~Real Estate~~

~~Consumer~~

~~Residential~~

~~Total~~

~~For the Quarter Ended:~~

~~September 30, 2022~~

~~Number of Loans~~

—

~~Pre-Modification Outstanding Recorded Investment~~

—

~~Post-Modification Outstanding Recorded Investment~~

—

~~Subsequent Default, Number of Contracts~~

—

~~Subsequent Default, Recorded Investment~~

—

~~September 30, 2021~~

~~Number of Loans~~

—

~~Pre-Modification Outstanding Recorded Investment~~

—

~~Post-Modification Outstanding Recorded Investment~~

—

~~Subsequent Default, Number of Contracts~~

—

~~Subsequent Default, Recorded Investment~~

—


	September 30, 2023		December 31, 2022		September 30, 2022
Balance:
BTFP Advances	150,000		—		—
FHLBNY Overnight Advances	10,000		27,000		—
FHLBNY Term Advances	14,300		27,800		25,000

Total Borrowings	$	174,300	$	54,800	$	25,000

Maximum Borrowing Capacity:
Federal Funds Purchased	$	52,000	$	52,000	$	52,000
Federal Home Loan Bank of New York	607,596		663,259		799,544
Federal Reserve Bank of New York	722,493		649,112		650,642

Available Borrowing Capacity:
Federal Funds Purchased	$	52,000	$	52,000	$	52,000
Federal Home Loan Bank of New York	449,296		608,458		774,544
Federal Reserve Bank of New York	722,493		649,112		650,642

~~In general, prior~~Arrow's subsidiary banks have in place unsecured federal funds lines of credit with two correspondent banks. As a member of the FHLBNY, Arrow participates in the advance program which allows for overnight and term advances up to the ~~COVID-19~~ ~~pandemic~~,limit of pledged collateral, including FHLBNY stock and any loans ~~requiring modification were restructured~~secured by real estate such as commercial real estate, residential real estate and home equity loans (see Notes 4: Investment Securities, and 5: Loans to ~~accommodate~~ the ~~projected cash-flows~~Consolidated Financial Statements). The maximum borrowing capacities at the FHLBNY and FRB are determined based on the fair value of the ~~borrower. Such modifications may involve a reduction of~~collateral pledged, subject to discounts determined by the ~~interest rate, a significant deferral of payments or forgiveness of a portion of the outstanding principal balance.~~respective lenders. As ~~indicated in the table above, no loans modified during the preceding twelve months subsequently defaulted as~~ of September 30, ~~2022.~~2023, the carrying cost for the FHLBNY collateral was approximately $874 million and approximately $1.2 billion for the FRB. As of September 30, 2023, the fair value for the FHLBNY collateral was approximately $741 million and approximately $1 billion for the FRB. The investment in FHLBNY stock is proportional to the total of Arrow's overnight and term advances (see the Schedule of Federal Reserve Bank and Federal Home Loan Bank Stock in Note 4, Investment Securities, to the Consolidated Financial Statements). Arrow's bank subsidiaries have also established borrowing facilities with the FRB of New York for potential “discount window” advances, pledging certain consumer loans as collateral (see Note 5,

Loans, to the Consolidated Financial Statements).

Debt Maturities

BTFP Advances - The BTFP was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors. In the second quarter of 2023, Arrow borrowed $150 million as part of the BTFP primarily replacing FHLB Advances.The BTFP Advances mature in less than 12 months and have a weighted average interest rate of 4.83%.

Maturity Schedule of FHLBNY Term Advances:


	Balances						Weighted Average Rate

Final Maturity	9/30/2023		12/31/2022		9/30/2022		9/30/2023		12/31/2022		9/30/2022
First Year	$	7,800	$	27,800	$	5,000	5.14	%	2.70	%	1.81	%
Second Year	6,500		—		20,000		5.59	%	—	%	1.75	%
Total	$	14,300	$	27,800	$	25,000	5.38	%	2.70	%	1.77	%

Long Term Debt - Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Debentures

At September 30, 2023, there were outstanding two classes of financial instruments issued by two separate subsidiary business trusts of Arrow, Arrow Capital Statutory Trust II ("ACST II") and Arrow Capital Statutory Trust III ("ACST III" and, together with ACST II, the "Trusts"), identified as “Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts” on the Consolidated Balance Sheets and the Consolidated Statements of Income.

The first of the two classes of trust-issued instruments outstanding at year-end was issued by ACST II, a Delaware business trust established on July 16, 2003, upon the filing of a certificate of trust with the Delaware Secretary of State. In July 2003, ACST II issued all of its voting (common) stock to Arrow and issued and sold to an unaffiliated purchaser 30-year guaranteed preferred beneficial interests in the trust's assets ("ACST II TRUPS"). The rate on the securities is variable, adjusting quarterly to the 3-month LIBOR plus 3.15%. Arrow designated SOFR as the replacement index for financial instruments. The rate on the securities will be tied to the 3-month Secured Overnight Financing Rate ("SOFR") plus 3.15% post-conversion. ACST II used the proceeds of the sale of the ACST II TRUPS to purchase an identical amount of junior subordinated debentures issued by Arrow that bear an interest rate identical at all times to the rate payable on the ACST II TRUPS. The ACST II TRUPS became redeemable after July 23, 2008 and mature on July 23, 2033.

The second of the two classes of trust-issued instruments outstanding at year-end was issued by ACST III, a Delaware business trust established on December 23, 2004, upon the filing of a certificate of trust with the Delaware Secretary of State. On December 28, 2004, the ACST III issued all of its voting (common) stock to Arrow and issued and sold to an unaffiliated purchaser 30-year guaranteed preferred beneficial interests in the trust's assets ("ACST III TRUPS"). The rate on the ACST III TRUPS is a variable rate, adjusted quarterly, equal to the 3-month LIBOR plus 2.00%. The rate on the securities will be tied to the 3-month SOFR plus 2.00% post-conversion. ACST III used the proceeds of the sale of the ACST III TRUPS to purchase an identical amount of junior subordinated debentures issued by Arrow that bear an interest rate identical at all times to the rate payable on the ACST III TRUPS. The ACST III TRUPS became redeemable on or after March 31, 2010 and mature on December 28, 2034.

Arrow has entered into interest rate swaps to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities attributable to the Trusts. These agreements are designated as cash flow hedges.

The primary assets of the Trusts are Arrow's junior subordinated debentures discussed above, and the sole revenues of the Trusts are payments received by them from Arrow with respect to the junior subordinated debentures. The trust preferred securities issued by the Trusts are non-voting. All common voting securities of the Trusts are owned by Arrow. Arrow used the net proceeds from its sale of junior subordinated debentures to the Trusts, facilitated by the Trusts' sale of their trust preferred securities to the purchasers thereof, for general corporate purposes. The trust preferred securities and underlying junior subordinated debentures, with associated expense that is tax deductible, qualify as Tier I capital under regulatory definitions.

Arrow's primary source of funds to pay interest on the debentures that are held by the Trusts are current dividends received by Arrow from its subsidiary banks. Accordingly, Arrow's ability to make payments on the debentures, and the ability of the Trusts to make payments on their trust preferred securities, are dependent upon the continuing ability of Arrow's subsidiary banks to pay dividends to Arrow. Since the trust preferred securities issued by the subsidiary trusts and the underlying junior subordinated debentures issued by Arrow at September 30, 2023, December 31, 2022, and September 30, 2022 are classified as debt for financial statement purposes, the expense associated with these securities is recorded as interest expense in the Consolidated Statements of Income for the three years.

Schedule of Guaranteed Preferred Beneficial Interests in Corporation's Junior Subordinated Debentures


	September 30, 2023			December 31, 2022			September 30, 2022
ACST II
Balance	$	10,000		$	10,000		$	10,000
Period End:
Variable Interest Rate	8.81		%	6.82		%	6.82		%
Fixed Interest Rate resulting from cash flow hedge agreement	4.00		%	4.00		%	4.00		%

ACST III
Balance	$	10,000		$	10,000		$	10,000
Period End:
Variable Interest Rate	7.66		%	5.67		%	5.67		%
Fixed Interest Rate resulting from cash flow hedge agreement	2.86		%	2.86		%	2.86		%

Note 5.7. COMMITMENTS AND CONTINGENCIES (In Thousands)

The following table presents the notional amount and fair value of Arrow's off-balance sheet commitments to extend credit and commitments under standby letters of credit as of September 30, ~~2022,~~2023, December 31, ~~2021~~2022 and September 30, ~~2021:~~2022:


Commitments to Extend Credit and Letters of Credit	Commitments to Extend Credit and Letters of Credit							Commitments to Extend Credit and Letters of Credit
		September 30, 2022		December 31, 2021		September 30, 2021			September 30, 2023		December 31, 2022		September 30, 2022
Notional Amount:	Notional Amount:							Notional Amount:
Commitments to Extend Credit	Commitments to Extend Credit	$	440,167	$	402,280	$	431,452	Commitments to Extend Credit	$	464,661	$	424,197	$	440,167
Standby Letters of Credit	Standby Letters of Credit	3,445		3,223		3,392		Standby Letters of Credit	4,201		3,627		3,445
Fair Value:	Fair Value:							Fair Value:
Commitments to Extend Credit	Commitments to Extend Credit	$	—	$	—	$	—	Commitments to Extend Credit	$	—	$	—	$	—
Standby Letters of Credit	Standby Letters of Credit	—		24		21		Standby Letters of Credit	10		2		—

Arrow is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Commitments to extend credit include home equity lines of credit, commitments for residential and commercial construction loans and other personal and commercial lines of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contract or notional amounts of those instruments reflect the extent of the involvement Arrow has in particular classes of financial instruments.

Arrow's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. Arrow uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are not expected to be fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Arrow evaluates each customer's creditworthiness on a case-by-case basis. Home equity lines of credit are secured by residential real estate. Construction lines of credit are secured by underlying real estate. For other lines of credit, the amount of collateral obtained, if deemed necessary by Arrow upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Most of the commitments are variable rate instruments.

Arrow does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. Arrow has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with commercial lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit at September 30, ~~2022,~~2023, December 31, ~~2021~~2022 and September 30, ~~2021~~2022 represent the maximum potential future payments Arrow could be required to make. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Arrow's policies governing loan collateral apply to standby letters of credit at the time of credit extension. Loan-to-value ratios will generally range from 50% for movable assets, such as inventory, to 100% for liquid assets, such as bank CD's. Fees for standby letters of credit range from 1% to 3% of the notional amount. Fees are collected upfront and amortized over the life of the commitment. The carrying amount and fair value of Arrow's standby letters of credit at September 30, ~~2022,~~2023, December 31, ~~2021~~2022 and September 30, ~~2021,~~2022, were insignificant. The fair value of standby letters of credit is based on the fees currently charged for similar agreements or the cost to terminate the arrangement with the counterparties.

The fair value of commitments to extend credit is determined by estimating the fees to enter into similar agreements, taking into account the remaining terms and present creditworthiness of the counterparties, and for fixed rate loan commitments, the difference between the current and committed interest rates. Arrow provides several types of commercial lines of credit and standby letters of credit to its commercial customers. The pricing of these services is not isolated as Arrow considers the customer's complete deposit and borrowing relationship in pricing individual products and services. The commitments to extend credit also include commitments under home equity lines of credit, for which Arrow charges no fee. The carrying value and fair value of commitments to extend credit are not material and Arrow does not expect to incur any material loss as a result of these commitments.

In the normal course of business, Arrow and its subsidiary banks become involved in a variety of routine legal proceedings. At present, there are no legal proceedings pending or threatened, which in the opinion of management and counsel, would result in a material loss to Arrow, exceptExcept as noted ~~below.~~

below, Arrow, including its subsidiary banks, is not currently the subject of any material pending legal proceedings, other than ordinary routine litigation occurring in the normal course of their business. On an ongoing basis, Arrow is often the subject of, or a party to, various legal claims by other parties against Arrow, by Arrow against other parties, or involving Arrow, which arise in the normal course of business. Except as noted below, the various pending legal claims against Arrow will not, in the opinion of management based upon consultation with counsel, result in any material liability.

2831

May 12, 2023. The complaint further alleges that the Individual Defendants are liable for these materially false and misleading statements as "controlling persons" of the Company. Based on these allegations, the complaint brings two claims for violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and of Section 20(a) of the Exchange Act. Mr. Ashe, on behalf of a purported class of shareholders, seeks compensatory damages as well as recovery of the costs and fees associated with the litigation. A consolidated amended complaint is due December 5, 2023, and Defendants’ deadline to answer, move, or otherwise respond to the consolidated amended complaint is February 2, 2024. The Company believes the lawsuit to be without merit and expressly denies any wrongdoing in connection with the matters claimed in the complaint and intends to vigorously defend the lawsuit.

Note 6.8. COMPREHENSIVE ~~(LOSS) INCOME~~LOSS (In Thousands)

The following table presents the components of other comprehensive ~~(loss) income~~loss for the three and nine month periods ended September 30, ~~2022~~2023 and ~~2021:~~2022:


Schedule of Comprehensive (Loss) Income
Schedule of Comprehensive Loss														Schedule of Comprehensive Loss
		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended September 30						Nine Months Ended September 30,
				Tax						Tax							Tax						Tax
		Before-Tax		Benefit		Net-of-Tax		Before-Tax		Benefit		Net-of-Tax			Before-Tax		Benefit		Net-of-Tax		Before-Tax		Benefit		Net-of-Tax
		Amount		(Expense)		Amount		Amount		(Expense)		Amount			Amount		(Expense)		Amount		Amount		(Expense)		Amount
2022
2023														2023
Net Unrealized Securities Holding Loss on Securities Available-for-Sale Arising During the Period	Net Unrealized Securities Holding Loss on Securities Available-for-Sale Arising During the Period	$	(27,945)	$	7,144	$	(20,801)	$	(70,945)	$	18,137	$	(52,808)	Net Unrealized Securities Holding Loss on Securities Available-for-Sale Arising During the Period	$	(7,796)	$	2,010	$	(5,786)	$	(4,763)	$	1,227	$	(3,536)
Net Unrealized Gain on Cash Flow Swap	Net Unrealized Gain on Cash Flow Swap	1,046		(268)		778		3,737		(956)		2,781		Net Unrealized Gain on Cash Flow Swap	846		(221)		625		125		(34)		91

Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	75		(20)		55		57		(15)		42		Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	242		(61)		181		660		(169)		491
Amortization of Net Retirement Plan Actuarial Loss		564		(144)		420		592		(151)		441
Amortization of Net Retirement Plan Actuarial Gain														Amortization of Net Retirement Plan Actuarial Gain	(40)		10		(30)		(121)		31		(90)
Amortization of Net Retirement Plan Prior Service Cost	Amortization of Net Retirement Plan Prior Service Cost	57		(15)		42		171		(44)		127		Amortization of Net Retirement Plan Prior Service Cost	51		(12)		39		154		(39)		115
Other Comprehensive Loss	Other Comprehensive Loss	$	(26,203)	$	6,697	$	(19,506)	$	(66,388)	$	16,971	$	(49,417)	Other Comprehensive Loss	$	(6,697)	$	1,726	$	(4,971)	$	(3,945)	$	1,016	$	(2,929)

2021
2022														2022
Net Unrealized Securities Holding Loss on Securities Available-for-Sale Arising During the Period	Net Unrealized Securities Holding Loss on Securities Available-for-Sale Arising During the Period	$	(1,719)	$	440	$	(1,279)	$	(5,333)	$	1,364	$	(3,969)	Net Unrealized Securities Holding Loss on Securities Available-for-Sale Arising During the Period	$	(27,945)	$	7,144	$	(20,801)	$	(70,945)	$	18,137	$	(52,808)
Net Unrealized Gain on Cash Flow Swap	Net Unrealized Gain on Cash Flow Swap	245		(62)		183		1,281		(327)		954		Net Unrealized Gain on Cash Flow Swap	1,046		(268)		778		3,737		(956)		2,781
Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	(34)		9		(25)		(92)		24		(68)		Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	75		(20)		55		57		(15)		42

Amortization of Net Retirement Plan Actuarial Loss	Amortization of Net Retirement Plan Actuarial Loss	22		(5)		17		68		(17)		51		Amortization of Net Retirement Plan Actuarial Loss	564		(144)		420		592		(151)		441
Amortization of Net Retirement Plan Prior Service Cost	Amortization of Net Retirement Plan Prior Service Cost	59		(16)		43		175		(46)		129		Amortization of Net Retirement Plan Prior Service Cost	57		(15)		42		171		(44)		127
Other Comprehensive Loss	Other Comprehensive Loss	$	(1,427)	$	366	$	(1,061)	$	(3,901)	$	998	$	(2,903)	Other Comprehensive Loss	$	(26,203)	$	6,697	$	(19,506)	$	(66,388)	$	16,971	$	(49,417)

2933

The following table presents the changes in accumulated other comprehensive (loss) income by component:


Changes in Accumulated Other Comprehensive (Loss) Income by Component (1)	Changes in Accumulated Other Comprehensive (Loss) Income by Component (1)																Changes in Accumulated Other Comprehensive (Loss) Income by Component (1)

		Unrealized (Loss) and Gain on Available-for-Sale Securities				Unrealized Gain on Cash Flow Swap			Defined Benefit Plan Items						Total				Unrealized Loss on Available-for-Sale Securities				Unrealized Gain on Cash Flow Swap			Defined Benefit Plan Items						Total
								Net Actuarial Loss			Net Prior Service Cost										Net Actuarial Loss					Net Prior Service Cost

For the Quarter-To-Date periods ended:
June 30, 2022				$	(32,621)							$	3,310				$	660				$	(913)		$	(29,564)
For the quarter-to-date periods ended:																	For the quarter-to-date periods ended:
June 30, 2023																	June 30, 2023		$	(46,591)			$	3,830		$	(4,527)		$	(325)		$	(47,613)
Other comprehensive income or loss before reclassifications	Other comprehensive income or loss before reclassifications			(20,801)				778			—			—					(20,023)		Other comprehensive income or loss before reclassifications	(5,786)			625			—			—			(5,161)
Amounts reclassified from accumulated other comprehensive income or loss	Amounts reclassified from accumulated other comprehensive income or loss	—				55			420			42			517		Amounts reclassified from accumulated other comprehensive income or loss		—				181			(30)			39			190
Net current-period other comprehensive income or loss	Net current-period other comprehensive income or loss	(20,801)				833			420			42			(19,506)		Net current-period other comprehensive income or loss		(5,786)				806			(30)			39			(4,971)

September 30, 2023																	September 30, 2023		$	(52,377)			$	4,636		$	(4,557)		$	(286)		$	(52,584)

June 30, 2022																	June 30, 2022		$	(32,621)			$	3,310		$	660		$	(913)		$	(29,564)
Other comprehensive (loss) or income before reclassifications																	Other comprehensive (loss) or income before reclassifications		(20,801)				778			—			—			(20,023)
Amounts reclassified from accumulated other comprehensive income or loss																	Amounts reclassified from accumulated other comprehensive income or loss		—				55			420			42			517
Net current-period other comprehensive (loss) or income																	Net current-period other comprehensive (loss) or income		(20,801)				833			420			42			(19,506)

September 30, 2022	September 30, 2022	$	(53,422)			$	4,143		$	1,080		$	(871)		$	(49,070)	September 30, 2022		$	(53,422)			$	4,143		$	1,080		$	(871)		$	(49,070)

June 30, 2021		$	3,109			$	1,213		$	(5,895)		$	(1,085)		$	(2,658)
For the Year-To-Date periods ended:																	For the Year-To-Date periods ended:

December 31, 2022																	December 31, 2022		$	(48,841)			$	4,054		$	(4,467)		$	(401)		$	(49,655)
Other comprehensive income or loss before reclassifications	Other comprehensive income or loss before reclassifications	(1,279)				183			—			—			(1,096)		Other comprehensive income or loss before reclassifications		(3,536)				91			—			—			(3,445)
Amounts reclassified from accumulated other comprehensive income or loss	Amounts reclassified from accumulated other comprehensive income or loss	—				(25)			17			43			35		Amounts reclassified from accumulated other comprehensive income or loss		—				491			(90)			115			516
Net current-period other comprehensive income or loss	Net current-period other comprehensive income or loss	(1,279)				158			17			43			(1,061)		Net current-period other comprehensive income or loss		(3,536)				582			(90)			115			(2,929)

September 30, 2021		$	1,830			$	1,371		$	(5,878)		$	(1,042)		$	(3,719)

For the Year-To-Date periods ended:
September 30, 2023																	September 30, 2023		$	(52,377)			$	4,636		$	(4,557)		$	(286)		$	(52,584)

December 31, 2021	December 31, 2021	$	(614)			$	1,320		$	639		$	(998)		$	347	December 31, 2021		$	(614)			$	1,320		$	639		$	(998)		$	347
Other comprehensive income or loss before reclassifications	Other comprehensive income or loss before reclassifications	(52,808)				2,781			—			—			(50,027)		Other comprehensive income or loss before reclassifications		(52,808)				2,781			—			—			(50,027)
Amounts reclassified from accumulated other comprehensive income or loss	Amounts reclassified from accumulated other comprehensive income or loss	—				42			441			127			610		Amounts reclassified from accumulated other comprehensive income or loss		—				42			441			127			610
Net current-period other comprehensive income or loss	Net current-period other comprehensive income or loss	(52,808)				2,823			441			127			(49,417)		Net current-period other comprehensive income or loss		(52,808)				2,823			441			127			(49,417)

September 30, 2022	September 30, 2022	$	(53,422)			$	4,143		$	1,080		$	(871)		$	(49,070)	September 30, 2022		$	(53,422)			$	4,143		$	1,080		$	(871)		$	(49,070)

December 31, 2020		$	5,799			$	485		$	(5,929)		$	(1,171)		$	(816)
Other comprehensive income or loss before reclassifications		(3,969)				954			—			—			(3,015)
Amounts reclassified from accumulated other comprehensive income		—				(68)			51			129			112
Net current-period other comprehensive income or loss		(3,969)				886			51			129			(2,903)

September 30, 2021		$	1,830			$	1,371		$	(5,878)		$	(1,042)		$	(3,719)

(1) All amounts are net of tax.

3034

The following table presents the reclassifications out of accumulated other comprehensive income or loss:

Reclassifications Out of Accumulated Other Comprehensive Income or Loss
Details about Accumulated Other Comprehensive Income or Loss Components Amounts Reclassified from Accumulated Other Comprehensive Income or Loss Affected Line Item in the Statement Where Net Income Is Presented
For the Quarter-to-date periods ended:
September 30, 2022
Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense $ (75) Interest expense
Amortization of defined benefit pension items:
Prior-service costs (57) (1) Salaries and Employee Benefits
Actuarial loss (564) (1) Salaries and Employee Benefits
(696) Total before Tax
179 Provision for Income Taxes
Total reclassifications for the period $ (517) Net of Tax
September 30, 2021
Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense $ 34 Interest expense
Amortization of defined benefit pension items:
Prior-service costs $ (59) (1) Salaries and Employee Benefits
Actuarial loss (22) (1) Salaries and Employee Benefits
(47) Total before Tax
12 Provision for Income Taxes
Total reclassifications for the period $ (35) Net of Tax
For the Year-to-date periods ended:
September 30, 2022
Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense $ (57) Interest expense
Amortization of defined benefit pension items:
Prior-service costs (171) (1) Salaries and Employee Benefits
Actuarial loss (592) (1) Salaries and Employee Benefits
(820) Total before Tax
210 Provision for Income Taxes
Total reclassifications for the period $ (610) Net of Tax
September 30, 2021
Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense 92 Interest expense
Amortization of defined benefit pension items:
Prior-service costs $ (175) (1) Salaries and Employee Benefits
Actuarial loss (68) (1) Salaries and Employee Benefits
(151) Total before Tax
39 Provision for Income Taxes
Total reclassifications for the period $ (112) Net of Tax
(1) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost.


Reclassifications Out of Accumulated Other Comprehensive Income or Loss

Details about Accumulated Other Comprehensive Income or Loss Components	Amounts Reclassified from Accumulated Other Comprehensive Income or Loss			Affected Line Item in the Statement Where Net Income Is Presented

For the quarter-to-date periods ended:

September 30, 2023





Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	$	(242)		Interest expense
Amortization of defined benefit pension items:
Prior-service costs	(51)		(1)	Salaries and Employee Benefits
Actuarial loss	40		(1)	Salaries and Employee Benefits
	(253)			Total before Tax
	63			Provision for Income Taxes
Total reclassifications for the period	$	(190)		Net of Tax



September 30, 2022
Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	$	(75)		Interest expense
Amortization of defined benefit pension items:
Prior-service costs	$	(57)	(1)	Salaries and Employee Benefits
Actuarial loss	(564)		(1)	Salaries and Employee Benefits
	(696)			Total before Tax
	179			Provision for Income Taxes
Total reclassifications for the period	$	(517)		Net of Tax



For the Year-to-date periods ended:

September 30, 2023





Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	$	(660)		Interest expense
Amortization of defined benefit pension items:
Prior-service costs	(154)		(1)	Salaries and Employee Benefits
Actuarial loss	121		(1)	Salaries and Employee Benefits
	(693)			Total before Tax
	177			Provision for Income Taxes
Total reclassifications for the period	$	(516)		Net of Tax



September 30, 2022





Reclassification of Net Unrealized Gain on Cash Flow Hedge Agreements to Interest Expense	$	(57)		Interest expense
Amortization of defined benefit pension items:
Prior-service costs	(171)		(1)	Salaries and Employee Benefits
Actuarial loss	(592)		(1)	Salaries and Employee Benefits
	(820)			Total before Tax
	210			Provision for Income Taxes
Total reclassifications for the period	$	(610)		Net of Tax

(1) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost.

3135

Note 7.9. STOCK-BASED COMPENSATION (Dollars In Thousands, Except Share and Per Share Amounts)

Arrow has established three stock-based compensation plans: a Long Term Incentive Plan, an Employee Stock Purchase Plan (ESPP) and an Employee Stock Ownership Plan (ESOP). All share and per share data have been adjusted for the September ~~23, 2022~~26, 2023 3% stock dividend.

Long Term Incentive Plan

The Long Term Incentive Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, performance units and performance shares. The Compensation Committee of the Board of Directors administers the Long Term Incentive Plan.

Stock Options - Options may be granted at a price no less than the greater of the par value or fair market value of such shares on the date on which such option is granted, and generally expire ten years from the date of grant. The options usually vest over a four-year period.

The following table summarizes information about stock option activity for the year to date period ended September 30, ~~2022:~~2023:


		Shares			Weighted Average Exercise Price			Shares			Weighted Average Exercise Price

Outstanding at January 1, 2022		278,899			$	27.62
Outstanding at January 1, 2023							Outstanding at January 1, 2023	287,444			$	28.56
Granted	Granted	58,710			34.79		Granted	57,680			31.47
Exercised	Exercised	(17,803)			20.56		Exercised	(3,885)			20.95
Forfeited	Forfeited	(18,844)			30.71		Forfeited	(35,139)			30.91
Outstanding at September 30, 2022		300,962			29.24
Outstanding at September 30, 2023							Outstanding at September 30, 2023	306,100			28.94

Vested at Period-End	Vested at Period-End	178,250			27.56		Vested at Period-End	207,642			27.81
Expected to Vest	Expected to Vest	122,712			31.68		Expected to Vest	98,458			31.32

Stock Options Granted	Stock Options Granted						Stock Options Granted
Weighted Average Grant Date Information:	Weighted Average Grant Date Information:						Weighted Average Grant Date Information:
Fair Value of Options Granted	Fair Value of Options Granted	$	7.43				Fair Value of Options Granted	$	7.78
Fair Value Assumptions:	Fair Value Assumptions:						Fair Value Assumptions:
Dividend Yield	Dividend Yield	2.90		%			Dividend Yield	3.30		%
Expected Volatility	Expected Volatility	27.15		%			Expected Volatility	28.38		%
Risk Free Interest Rate	Risk Free Interest Rate	1.69		%			Risk Free Interest Rate	3.57		%
Expected Lives (in years)	Expected Lives (in years)	8.56					Expected Lives (in years)	8.34

The following table presents information on the amounts expensed related to stock options for the three and nine month periods ended September 30, ~~2022~~2023 and ~~2021:~~2022:

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
Amount expensed $ 79 $ 71 $ 233 $ 212


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Amount expensed	$	24	$	79	$	196	$	233

The expense recorded during the third quarter of 2023 reflects the reversal of previously recorded expense related to forfeited stock options related to the departure of the former President and CEO in accordance with the terms of the applicable award agreements.

Restricted Stock Units - The Company grants restricted stock units which gives the recipient the right to receive shares of Company stock upon vesting. The fair value of each restricted stock unit is the market value of Company stock on the date of grant. 100% of the restricted stock unit awards vest three years from the grant date. Once vested, the restricted stock units become vested units and are no longer forfeitable. Vested units ~~settle upon retirement of~~are not settled until the ~~recipient.~~recipient's employment has terminated. Unvested restricted stock unit awards will generally be forfeited if the recipient ceases to be employed by the Company, with limited exceptions.

3236

The following table summarizes information about restricted stock unit activity for the periods ended September 30, ~~2022~~2023 and ~~2021:~~2022:


						Restricted Stock Units	Weighted Average Grant Date Fair Value
Non-vested at January 1, 2023					Non-vested at January 1, 2023	13,925	$	30.47
Granted					Granted	5,164	31.47
Vested					Vested	(19,089)	30.74

Non-vested at September 30, 2023					Non-vested at September 30, 2023	—
		Restricted Stock Units	Weighted Average Grant Date Fair Value
Non-vested at January 1, 2022	Non-vested at January 1, 2022	13,599	$	29.27	Non-vested at January 1, 2022	14,007	28.42
Granted	Granted	4,312	34.79		Granted	4,441	33.78
Vested	Vested	(4,391)	28.17		Vested	(4,523)	27.35

Non-vested at September 30, 2022	Non-vested at September 30, 2022	13,520	31.38		Non-vested at September 30, 2022	13,925	30.47

Non-vested at January 1, 2021		12,373	29.81
Granted		5,026	27.71
Vested		(3,800)	28.95

Non-vested at September 30, 2021		13,599	29.27

The following table presents information on the amounts expensed related to restricted stock units for the periods ended September 30, ~~2022~~2023 and ~~2021:~~2022:

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2022 2021 2022 2021
Amount expensed $ 35 $ 32 $ 105 $ 98


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Amount expensed	$	246	$	35	$	321	$	105

The expense recorded during the third quarter of 2023 reflects accelerated vesting of restricted stock units related to the departure of the former President and CEO in accordance with the terms of the applicable award agreements.

Employee Stock Purchase Plan

Arrow sponsors an ESPP under which employees may purchase Arrow's common stock at a discount below market price. The current amount of the discount is 5%. Under current accounting guidance, a stock purchase plan with a discount of 5% or less is not considered a compensatory plan. In April 2023, Arrow suspended the operation of the ESPP as a result of the now resolved delay in filing the 2022 Form 10-K and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 and the related effects under applicable securities laws. In October 2023, the Board of Directors approved the adoption of a new Employee Stock Purchase Plan that is intended to satisfy all requirements of Section 423 of the Internal Revenue Code, which Arrow intends to make effective January 1, 2024. Under the new qualified plan, the amount of the discount will be 10%.

Employee Stock Ownership Plan

Arrow maintains an ESOP, pursuant to which substantially all employees of Arrow and its subsidiaries are eligible to participate upon satisfaction of applicable service requirements. The Company makes cash contributions to the ESOP each year.

3337

Note 8.10. RETIREMENT BENEFIT PLANS (Dollars in Thousands)

Arrow sponsors qualified and non-qualified defined benefit pension plans and other postretirement benefit plans for its employees. Arrow maintains a non-contributory pension plan, which covers substantially all employees. Effective December 1, 2002, all active participants in the qualified defined benefit pension plan were given a one-time irrevocable election to continue participating in the traditional plan design, for which benefits were based on years of service and the participant’s final compensation (as defined), or to begin participating in the new cash balance plan design. All employees who first participate in the plan after December 1, 2002 automatically participate in the cash balance plan design. The interest credits under the cash balance plan are based on the 30-year U.S. Treasury rate in effect for November of the prior year with a minimum interest credit of 3%. The service credits under the cash balance plan are equal to 6.0% of eligible salaries for employees who become participants on or after January 1, 2003. For employees in the plan prior to January 1, 2003, the service credits are scaled based on the age of the participant, and range from 6.0% to 12.0%. The funding policy is to contribute up to the maximum amount that can be deducted for federal income tax purposes and to make all payments required under The Employee Retirement Income Security Act (ERISA). Arrow also maintains a supplemental non-qualified unfunded retirement plan to provide eligible employees of Arrow and its subsidiaries with benefits in excess of qualified plan limits imposed by federal tax law.

Arrow has multiple non-pension postretirement benefit plans. The health care, dental and life insurance plans are contributory, with participants’ contributions adjusted annually. Arrow’s policy is to fund the cost of postretirement benefits based on the current cost of the underlying policies. However, the health care plan provision allows for grandfathered participants to receive automatic increases of Company contributions each year based on the increase in inflation, limited to a maximum of 5%.

As of December 31, ~~2021,~~2022, Arrow ~~began using~~uses the sex-distinct amount-weighted Pri-2012 mortality tables for employees, healthy ~~annuitants~~retirees and contingent survivors, ~~adjusted for~~with mortality improvements ~~with the~~projected using Scale MP-2021 ~~mortality improvement scale~~ on a generational basis for the Pension Plan and the sex-distinct amount-weighted White Collar tables for employees, healthy ~~annuitants~~retirees and contingent survivors, ~~adjusted for~~with mortality improvements ~~with the scale~~projected using Scale MP-2021 ~~mortality improvement scale~~ on a generational basis for the Select Executive Retirement Plan. As of December 31, 2021, Arrow began using the sex-distinct Pri.H-2012 headcount-weighted mortality tables for employees and healthy annuitants, adjusted for mortality improvements with the Scale MP-2021 mortality improvement scale on a generational basis.

Segment interest rates of ~~1.02%~~5.09%, ~~2.72%~~5.60%, ~~3.08%~~5.41% were used in determining the present value of a lump sum payment/annuitizing cash balance accounts ~~for the 2021 plan year.~~as of December 31, 2022.

Effective January 1, 2021, ~~Glens Falls National~~GFNB amended the Arrow Financial Corporation Employees' Pension Plan (the "Plan"). The Plan change was adopted January 1, 2021 and the amendment was valued as of December 31, 2020. The Plan amendment was as follows:

Effective January 1, 2021, the benefit payable to or on behalf of each participant:

• whose employment with the Employer (or any predecessor Employer, except as noted below) terminated on or before
January 1, 2016;

• who satisfied the requirements for early, normal, or late retirement as of such termination;

• who never participated in the United Vermont Bancorporation Plan; and

• who is, or whose beneficiary is, receiving monthly benefit payments from the Plan as of January 1, 2021 (including a
participant or beneficiary who shall commence receiving benefits from the Plan as of January 1, 2021), shall be increased
by 3%.

The foregoing increase was applied to the monthly benefit actually payable to the participant, or to the participant's beneficiary, as of January 1, 2021, determined after all applicable adjustments, regardless of whether such benefit had been determined under the Company's plan or the plan of a predecessor employer that had been merged into the Plan.

The plan amendment caused a $351,638 increase in the projected benefit obligation creating a positive service cost which will be amortized over 9.70 years (the average expected future service of active plan participants.)

Effective January 1, 2021, ~~Glens Falls National~~GFNB amended the Arrow Financial Corporation Employees' Select Executive Retirement Plan. The plan change was adopted January 1, 2021 and the amendment was valued as of December 31, 2020. The plan amendment provides a special adjustment to the monthly benefit payment for certain retirees. The plan amendment caused a $122,797 increase in the projected benefit obligation creating a positive prior service cost which will be amortized over 12.5 years.

Settlement accounting is required when lump sum payments during a fiscal year exceed that fiscal year's Service Cost plus Interest Cost components of the Net Periodic Pension Cost. For 2022, the sum of the Service Cost and Interest Cost ~~is expected to be $3,316,118~~was $3.3 million and the 2022 total lump sum payments ~~through September 30, 2022 have~~ exceeded that ~~amount.~~amount by the end of the third quarter 2022. The Plan ~~must~~ therefore ~~recognize~~recognized in the 2022 Net Periodic Pension Cost a portion of the Unamortized Net (Gain)/Loss equal to the ratio of the projected benefit obligation for the participants that received a lump sum to the total projected benefit obligation. As of December 31, 2022, the Unamortized Net ~~(Gain)/~~Loss prior to reflecting settlement accounting ~~is projected to be approximately $7,000,000.~~was $7.2 million. The ratio of the projected benefit obligation for participants that received a lump sum to the total projected benefit obligation ~~is 7.91%~~was 8.06%. The effect of the settlement that ~~must be~~was recognized in the 2022 Net Periodic Pension Cost ~~is estimated at September 30, 2022 to be $550,000,~~was $577 thousand, which ~~has been~~was fully reflected in the 2022 Net Periodic ~~Cost~~Cost. Settlement accounting was not required for the ~~quarter~~nine-month period ended September 30, ~~2022 .~~2023.

The following tables provide the components of net periodic benefit costs for the three and nine-month periods ended September 30, ~~2022~~2023 and ~~2021:~~2022:

Employees' Select Executive Postretirement
Pension Retirement Benefit
Plan Plan Plans
Net Periodic Cost
For the Three Months Ended September 30, 2022:
Service Cost 1
$ 469 $ 208 $ 23
Interest Cost 2
360 57 61


									Employees'		Select Executive		Postretirement
									Pension		Retirement		Benefit
									Plan		Plan		Plans
Net Periodic Benefit Cost								Net Periodic Benefit Cost
For the Three Months Ended September 30, 2023:								For the Three Months Ended September 30, 2023:
Service Cost 1								Service Cost 1	$	398	$	143	$	14
Interest Cost 2								Interest Cost 2	524		85		82
Expected Return on Plan Assets 2	Expected Return on Plan Assets 2	(1,078)		—		—		Expected Return on Plan Assets 2	(854)		—		—
Amortization of Prior Service Cost 2	Amortization of Prior Service Cost 2	19		11		27		Amortization of Prior Service Cost 2	16		9		26
Amortization of Net Loss (Gain) 2	Amortization of Net Loss (Gain) 2	550		53		(39)		Amortization of Net Loss (Gain) 2	30		18		(88)
Net Periodic Cost	Net Periodic Cost	$	320	$	329	$	72	Net Periodic Cost	$	114	$	255	$	34

Plan Contributions During the Period	Plan Contributions During the Period	$	—	$	116	$	43	Plan Contributions During the Period	$	—	$	99	$	28

For the Three Months Ended September 30, 2021:
For the Three Months Ended September 30, 2022:								For the Three Months Ended September 30, 2022:
Service Cost 1	Service Cost 1	$	484	$	146	$	27	Service Cost 1	$	469	$	208	$	23
Interest Cost 2	Interest Cost 2	340		48		62		Interest Cost 2	360		57		61
Expected Return on Plan Assets 2	Expected Return on Plan Assets 2	(945)		—		—		Expected Return on Plan Assets 2	(1,078)		—		—
Amortization of Prior Service Cost 2	Amortization of Prior Service Cost 2	20		12		27		Amortization of Prior Service Cost 2	19		11		27
Amortization of Net Loss (Gain) 2	Amortization of Net Loss (Gain) 2	—		44		(22)		Amortization of Net Loss (Gain) 2	550		53		(39)
Net Periodic (Benefit) Cost		$	(101)	$	250	$	94
Net Periodic Cost								Net Periodic Cost	$	320	$	329	$	72

Plan Contributions During the Period	Plan Contributions During the Period	$	—	$	118	$	32	Plan Contributions During the Period	$	—	$	116	$	43

Net Periodic Benefit Cost	Net Periodic Benefit Cost							Net Periodic Benefit Cost
For the Nine Months Ended September 30, 2023:								For the Nine Months Ended September 30, 2023:
Service Cost 1								Service Cost 1	$	1,195	$	428	$	42
Interest Cost 2								Interest Cost 2	1,573		244		249
Expected Return on Plan Assets 2								Expected Return on Plan Assets 2	(2,562)		—		—
Amortization of Prior Service Cost 2								Amortization of Prior Service Cost 2	47		29		78
Amortization of Net Loss (Gain) 2								Amortization of Net Loss (Gain) 2	89		55		(265)
Net Periodic Cost								Net Periodic Cost	$	342	$	756	$	104

Plan Contributions During the Period								Plan Contributions During the Period	$	—	$	325	$	75

Estimated Future Contributions in the Current Fiscal Year								Estimated Future Contributions in the Current Fiscal Year	$	—	$	108	$	25

For the Nine Months Ended September 30, 2022:	For the Nine Months Ended September 30, 2022:							For the Nine Months Ended September 30, 2022:
Service Cost 1	Service Cost 1	$	1,408	$	626	$	68	Service Cost 1	$	1,408	$	626	$	68
Interest Cost 2	Interest Cost 2	1,079		169		185		Interest Cost 2	1,079		169		185
Expected Return on Plan Assets 2	Expected Return on Plan Assets 2	(3,235)		—		—		Expected Return on Plan Assets 2	(3,235)		—		—
Amortization of Prior Service Cost 2	Amortization of Prior Service Cost 2	58		33		80		Amortization of Prior Service Cost 2	58		33		80
Amortization of Net Loss (Gain) 2	Amortization of Net Loss (Gain) 2	550		159		(117)		Amortization of Net Loss (Gain) 2	550		159		(117)
Net Periodic (Benefit) Cost	Net Periodic (Benefit) Cost	$	(140)	$	987	$	216	Net Periodic (Benefit) Cost	$	(140)	$	987	$	216

Plan Contributions During the Period	Plan Contributions During the Period	$	—	$	347	$	131	Plan Contributions During the Period	$	—	$	347	$	131

Estimated Future Contributions in the Current Fiscal Year		$	—	$	116	$	43

For the Nine Months Ended September 30, 2021:
Service Cost 1		$	1,451	$	437	$	82
Interest Cost 2		1,023		143		186
Expected Return on Plan Assets 2		(2,835)		—		—
Amortization of Prior Service Cost 2		59		36		80
Amortization of Net Loss (Gain) 2		—		134		(66)
Net Periodic (Benefit) Cost		$	(302)	$	750	$	282

Plan Contributions During the Period		$	—	$	354	$	87

Footnotes:

1. Included in Salaries and Employee Benefits on the Consolidated Statements of Income

2. Included in Other Operating Expense on the Consolidated Statements of Income

A contribution to the qualified pension plan was not required during the period ended September 30, ~~2022~~2023 and currently, additional contributions in ~~2022~~2023 are not expected. Arrow makes contributions to its other post-retirement benefit plans in an amount equal to benefit payments for the year.

3539

Note 9.11. EARNINGS PER COMMON SHARE (In Thousands, Except Per Share Amounts)

The following table presents a reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per common share (EPS) for periods ended September 30, ~~2022~~2023 and ~~2021.~~2022. When applicable, share and per share amounts have been adjusted for the September ~~23, 2022,~~26, 2023, 3% stock dividend.


Earnings Per Share	Earnings Per Share									Earnings Per Share
		Three Months Ended				Year-to-Date Period Ended:					Three Months Ended				Nine Months Ended
		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021			September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Earnings Per Share - Basic:	Earnings Per Share - Basic:									Earnings Per Share - Basic:
Net Income	Net Income	$	12,163	$	12,989	$	36,712	$	39,548	Net Income	$	7,743	$	12,163	$	22,352	$	36,712
Weighted Average Shares - Basic	Weighted Average Shares - Basic	16,512		16,508		16,506		16,495		Weighted Average Shares - Basic	17,050		17,007		17,049		17,001
Earnings Per Share - Basic	Earnings Per Share - Basic	$	0.74	$	0.79	$	2.22	$	2.40	Earnings Per Share - Basic	$	0.46	$	0.72	$	1.31	$	2.16

Earnings Per Share - Diluted:	Earnings Per Share - Diluted:									Earnings Per Share - Diluted:
Net Income	Net Income	$	12,163	$	12,989	$	36,712	$	39,548	Net Income	$	7,743	$	12,163	$	22,352	$	36,712
Weighted Average Shares - Basic	Weighted Average Shares - Basic	16,512		16,508		16,506		16,495		Weighted Average Shares - Basic	17,050		17,007		17,049		17,001
Dilutive Average Shares Attributable to Stock Options	Dilutive Average Shares Attributable to Stock Options	46		60		47		59		Dilutive Average Shares Attributable to Stock Options	—		47		—		49
Weighted Average Shares - Diluted	Weighted Average Shares - Diluted	16,558		16,568		16,553		16,554		Weighted Average Shares - Diluted	17,050		17,054		17,049		17,050
Earnings Per Share - Diluted	Earnings Per Share - Diluted	$	0.74	$	0.78	$	2.22	$	2.39	Earnings Per Share - Diluted	$	0.46	$	0.72	$	1.31	$	2.15

3640

Note ~~10.~~12. FAIR VALUES (Dollars In Thousands)

Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Subtopic 820-10 defines fair value, establishes a framework for measuring fair value in GAAP and requires certain disclosures about fair value measurements. There are no nonfinancial assets or liabilities measured at fair value on a recurring basis. The only assets or liabilities that Arrow measured at fair value on a recurring basis at September 30, ~~2022,~~2023, December 31, ~~2021~~2022 and September 30, ~~2021~~2022 were AFS securities, ~~available-for-sale,~~ equity securities and derivatives. Arrow held no securities or liabilities for trading on such dates.

The table below presents the financial instrument's fair value and the amounts within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement:


Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis	Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis									Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
				Fair Value Measurements at Reporting Date Using:									Fair Value Measurements at Reporting Date Using:
		Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Fair Value of Assets and Liabilities Measured on a Recurring Basis:	Fair Value of Assets and Liabilities Measured on a Recurring Basis:									Fair Value of Assets and Liabilities Measured on a Recurring Basis:
September 30, 2022
September 30, 2023										September 30, 2023
Assets:	Assets:									Assets:
Securities Available-for Sale:	Securities Available-for Sale:									Securities Available-for Sale:
U.S. Government & Agency Obligations	U.S. Government & Agency Obligations	$	163,965	$	—	$	163,965	$	—	U.S. Government & Agency Obligations	$	176,421	$	—	$	176,421	$	—
State and Municipal Obligations	State and Municipal Obligations	340		—		340		—		State and Municipal Obligations	280		—		280		—
Mortgage-Backed Securities	Mortgage-Backed Securities	409,949		—		409,949		—		Mortgage-Backed Securities	341,739		—		341,739		—
Corporate and Other Debt Securities	Corporate and Other Debt Securities	800		—		800		—		Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	Total Securities Available-for-Sale	575,054		—		575,054		—		Total Securities Available-for-Sale	519,240		—		519,240		—
Equity Securities	Equity Securities	2,126		—		2,126		—		Equity Securities	1,960		—		1,960		—
Total Securities Measured on a Recurring Basis	Total Securities Measured on a Recurring Basis	577,180		—		577,180		—		Total Securities Measured on a Recurring Basis	521,200		—		521,200		—
Derivatives, included in other assets		8,508		—		8,508		—
Derivative Assets										Derivative Assets	8,860		—		8,860		—
Total Measured on a Recurring Basis	Total Measured on a Recurring Basis	$	585,688	$	—	$	585,688	$	—	Total Measured on a Recurring Basis	$	530,060	$	—	$	530,060	$	—
Liabilities:	Liabilities:									Liabilities:
Derivatives, included in other liabilities		8,508		—		8,508		—
Derivative Liabilities										Derivative Liabilities	8,733		—		8,733		—
Total Measured on a Recurring Basis	Total Measured on a Recurring Basis	$	8,508	$	—	$	8,508	$	—	Total Measured on a Recurring Basis	$	8,733	$	—	$	8,733	$	—
December 31, 2021
December 31, 2022										December 31, 2022
Assets:	Assets:									Assets:
Securities Available-for Sale:	Securities Available-for Sale:									Securities Available-for Sale:
U.S. Government & Agency Obligations	U.S. Government & Agency Obligations	$	108,365	$	—	$	108,365	$	—	U.S. Government & Agency Obligations	$	175,199	$	—	$	175,199	$	—
State and Municipal Obligations	State and Municipal Obligations	400		—		400		—		State and Municipal Obligations	340		—		340		—
Mortgage-Backed Securities	Mortgage-Backed Securities	449,751		—		449,751		—		Mortgage-Backed Securities	397,156		—		397,156		—
Corporate and Other Debt Securities	Corporate and Other Debt Securities	800		—		800		—		Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	Total Securities Available-for-Sale	559,316		—		559,316		—		Total Securities Available-for-Sale	573,495		—		573,495		—
Equity Securities	Equity Securities	1,747		—		1,747		—		Equity Securities	2,174		—		2,174		—

3741


Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis	Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis									Fair Value of Assets and Liabilities Measured on a Recurring and Nonrecurring Basis
				Fair Value Measurements at Reporting Date Using:									Fair Value Measurements at Reporting Date Using:
		Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Total Securities Measured on a Recurring Basis	Total Securities Measured on a Recurring Basis	561,063		—		561,063		—		Total Securities Measured on a Recurring Basis	575,669		—		575,669		—
Derivatives, included in other liabilities		2,083		—		2,083		—
Derivative Assets										Derivative Assets	7,506		—		7,506		—
Total Measured on a Recurring Basis	Total Measured on a Recurring Basis	$	563,146	$	—	$	563,146	$	—	Total Measured on a Recurring Basis	$	583,175	$	—	$	583,175	$	—
Liabilities:	Liabilities:									Liabilities:
Derivatives, included in other liabilities		2,083		—		2,083		—
Derivative Liabilities										Derivative Liabilities	$	7,506	—		$	7,506	—
Total Measured on a Recurring Basis	Total Measured on a Recurring Basis	$	2,083	$	—	$	2,083	$	—	Total Measured on a Recurring Basis	$	7,506	$	—	$	7,506	$	—
September 30, 2021
September 30, 2022										September 30, 2022
Assets:	Assets:									Assets:
Securities Available-for Sale:	Securities Available-for Sale:									Securities Available-for Sale:
U.S. Government & Agency Obligations	U.S. Government & Agency Obligations	$	109,305	$	—	$	109,305	$	—	U.S. Government & Agency Obligations	$	163,965	$	—	$	163,965	$	—
State and Municipal Obligations	State and Municipal Obligations	400		—		400		—		State and Municipal Obligations	340		—		340		—
Mortgage-Backed Securities	Mortgage-Backed Securities	376,395		—		376,395		—		Mortgage-Backed Securities	409,949		—		409,949		—
Corporate and Other Debt Securities	Corporate and Other Debt Securities	800		—		800		—		Corporate and Other Debt Securities	800		—		800		—
Total Securities Available-for-Sale	Total Securities Available-for-Sale	486,900		—		486,900		—		Total Securities Available-for-Sale	575,054		—		575,054		—
Equity Securities	Equity Securities	1,886		—		1,886		—		Equity Securities	2,126		—		2,126		—
Total Securities Measured on a Recurring Basis	Total Securities Measured on a Recurring Basis	$	488,786	$	—	$	488,786	$	—	Total Securities Measured on a Recurring Basis	577,180		—		577,180		—
Derivatives, included in other assets		2,287		$	—	2,287		—
Derivative Assets										Derivative Assets	8,508		—		8,508		—
Total Measured on a Recurring Basis	Total Measured on a Recurring Basis	$	491,073	$	—	$	491,073	$	—	Total Measured on a Recurring Basis	$	585,688	$	—	$	585,688	$	—
Liabilities:	Liabilities:									Liabilities:
Derivatives, included in other liabilities		2,287		—		2,287		—
Derivative Liabilities										Derivative Liabilities	8,508		—		8,508		—
Total Measured on a Recurring Basis	Total Measured on a Recurring Basis	$	2,287	$	—	$	2,287	$	—	Total Measured on a Recurring Basis	$	8,508	$	—	$	8,508	$	—


		Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Gains (Losses) Recognized in Earnings		Fair Value		Quoted Prices In Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Gains (Losses) Recognized in Earnings
Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:	Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:										Fair Value of Assets and Liabilities Measured on a Nonrecurring Basis:
September 30, 2022
September 30, 2023											September 30, 2023
Collateral Dependent Evaluated Loans	Collateral Dependent Evaluated Loans	$	—	$	—	$	—	$	—		Collateral Dependent Evaluated Loans	$	—	$	—	$	—	$	—
Other Real Estate Owned and Repossessed Assets, Net	Other Real Estate Owned and Repossessed Assets, Net	604		—		—		604		—	Other Real Estate Owned and Repossessed Assets, Net	526		—		—		526		—
December 31, 2021
December 31, 2022											December 31, 2022
Collateral Dependent Impaired Loans	Collateral Dependent Impaired Loans	$	2,457	$	—	$	—	$	2,457		Collateral Dependent Impaired Loans	$	—	$	—	$	—	$	—
Other Real Estate Owned and Repossessed Assets, Net	Other Real Estate Owned and Repossessed Assets, Net	126		—		—		126		—	Other Real Estate Owned and Repossessed Assets, Net	593		—		—		593		—
September 30, 2021
September 30, 2022											September 30, 2022
Collateral Dependent Impaired Loans	Collateral Dependent Impaired Loans	$	2,456	$	—	$	—	$	2,456		Collateral Dependent Impaired Loans	$	—	$	—	$	—	$	—
Other Real Estate Owned and Repossessed Assets, Net	Other Real Estate Owned and Repossessed Assets, Net	351		—		—		351		13	Other Real Estate Owned and Repossessed Assets, Net	604		—		—		604		—

3842

The fair value of financial instruments is determined under the following hierarchy:

•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

•Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and,

•Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

Fair Value Methodology for Assets and Liabilities Measured on a Recurring Basis

The fair value of Level 1 AFS securities ~~available-for-sale~~ are based on unadjusted, quoted market prices from exchanges in active markets. The fair value of Level 2 AFS securities ~~available-for-sale~~ are based on an independent bond and equity pricing service for identical assets or significantly similar securities and an independent equity pricing service for equity securities not actively traded. The pricing services use a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. The fair value of Level 2 equities are based on the last observable price in open markets. The fair value of Level 2 equities are based on the last observable price in open markets. The fair value of Level 2 derivatives is determined using inputs that are observable in the market place obtained from third parties including yield curves, publicly available volatilities, and floating indexes.

Fair Value Methodology for Assets and Liabilities Measured on a Nonrecurring Basis

The fair value of collateral dependent evaluated loans and other real estate owned was based on third-party appraisals less estimated cost to sell. The appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses. Other assets which might have been included in this table include mortgage servicing rights, goodwill and other intangible assets. Arrow evaluates each of these assets for impairment at least annually, with no impairment recognized for these assets at September 30, ~~2022,~~2023, December 31, ~~2021~~2022 and September 30, ~~2021.~~2022.

Fair Value Methodology for Financial Instruments Not Measured on a Recurring or Nonrecurring Basis

The fair value for HTM securities ~~held-to-maturity~~ is determined utilizing an independent bond pricing service for identical assets or significantly similar securities. The pricing service uses a variety of techniques to arrive at fair value including market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.

ASU 2016-01 "Recognition and Measurement of Financial Assets and Financial Liabilities" requires that the fair value for loans must be disclosed using the "exit price" notion which is a reasonable estimate of what another party might pay in an orderly transaction. Fair values for loans are calculated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage, indirect auto and other consumer loans. Each loan category is further segmented into fixed and adjustable interest rate terms and by performing and nonperforming categories. The fair value of performing loans is calculated by determining the estimated future cash flow, which is the contractual cash flow adjusted for estimated prepayments. The discount rate is determined by starting with current market yields, and first adjusting for a liquidity premium. This premium is separately determined for each loan type. Then a credit loss component is determined utilizing the credit loss assumptions used in the allowance for credit loss model. Finally, a discount spread is applied separately for consumer loans vs. commercial loans based on market information and utilization of the swap curve.

The fair value of time deposits is based on the discounted value of contractual cash flows, except that the fair value is limited to the extent that the customer could redeem the certificate after imposition of a premature withdrawal penalty. The discount rates are estimated using the ~~Federal Home Loan Bank of New York (FHLBNY)~~FHLBNY yield curve, which is considered representative of Arrow’s time deposit rates. The fair value of all other deposits is equal to the carrying value.

~~The~~Within borrowings, the fair value of FHLBNY term advances is calculated by the ~~FHLBNY.~~FHLBNY and the fair value of the BTFP advances was determined using a discounted cash flow against the FHLB funding curve. The carrying value of all other borrowings approximate their market value.

The carrying amount of FHLBNY and FRB stock approximates fair value. If the stock was redeemed, the Company will receive an amount equal to the par value of the stock.

The book value of the outstanding trust preferred securities (Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts) are considered to approximate fair value since the interest rates are variable ~~(indexed~~(currently indexed to ~~the London Inter-Bank Offered Rate (LIBOR))~~SOFR) and Arrow is well-capitalized.

3943

Fair Value by Balance Sheet Grouping

The following table presents a summary of the carrying amount, the fair value or an amount approximating fair value and the fair value hierarchy of Arrow’s financial instruments:


Schedule of Fair Values by Balance Sheet Grouping	Schedule of Fair Values by Balance Sheet Grouping											Schedule of Fair Values by Balance Sheet Grouping
						Fair Value Hierarchy											Fair Value Hierarchy
													Carrying Value		Fair Value		Level 1		Level 2		Level 3
September 30, 2023												September 30, 2023
Cash and Cash Equivalents												Cash and Cash Equivalents	$	294,739	$	294,739	$	294,739	$	—	$	—
Securities Available-for-Sale												Securities Available-for-Sale	519,240		519,240		—		519,240		—
Securities Held-to-Maturity												Securities Held-to-Maturity	140,577		134,811		—		134,811		—
Equity Securities												Equity Securities	1,960		1,960		—		1,960		—
Federal Home Loan Bank and Federal Reserve Bank Stock												Federal Home Loan Bank and Federal Reserve Bank Stock	5,110		5,110		—		5,110		—
Net Loans												Net Loans	3,107,505		2,867,016		—		—		2,867,016
Accrued Interest Receivable												Accrued Interest Receivable	11,163		11,163		—		11,163		—
Derivative Assets												Derivative Assets	8,860		8,860				8,860
Deposits												Deposits	3,666,485		3,660,360		—		3,660,360		—

Borrowings												Borrowings	174,300		173,709		—		173,709		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts												Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable												Accrued Interest Payable	7,432		7,432		—		7,432		—
Derivative Liabilities												Derivative Liabilities	8,733		8,733		—		8,733		—

December 31, 2022												December 31, 2022
Cash and Cash Equivalents												Cash and Cash Equivalents	$	64,660	$	64,660	$	64,660	$	—	$	—
Securities Available-for-Sale												Securities Available-for-Sale	573,495		573,495		—		573,495		—
Securities Held-to-Maturity												Securities Held-to-Maturity	175,364		171,623		—		171,623		—
Equity Securities												Equity Securities	2,174		2,174				2,174
Federal Home Loan Bank and Federal Reserve Bank Stock												Federal Home Loan Bank and Federal Reserve Bank Stock	6,064		6,064		—		6,064		—
Net Loans												Net Loans	2,953,255		2,742,721		—		—		2,742,721
Accrued Interest Receivable												Accrued Interest Receivable	9,890		9,890		—		9,890		—
Derivative Assets												Derivative Assets	7,506		7,506		—		7,506		—
Deposits												Deposits	3,498,364		3,492,021		—		3,492,021		—

Federal Home Loan Bank Term Advances												Federal Home Loan Bank Term Advances	27,800		27,757		—		27,757		—

Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts												Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable												Accrued Interest Payable	357		357		—		357		—
Derivative Liabilities												Derivative Liabilities	7,506		7,506		—		7,506		—
		Carrying Value		Fair Value		Level 1		Level 2		Level 3
September 30, 2022	September 30, 2022											September 30, 2022
Cash and Cash Equivalents	Cash and Cash Equivalents	$	373,429	$	373,429	$	373,429	$	—	$	—	Cash and Cash Equivalents	$	373,429	$	373,429	$	373,429	$	—	$	—
Securities Available-for-Sale	Securities Available-for-Sale	575,054		575,054		—		575,054		—		Securities Available-for-Sale	575,054		575,054		—		575,054		—
Securities Held-to-Maturity	Securities Held-to-Maturity	182,178		175,800		—		175,800		—		Securities Held-to-Maturity	182,178		175,800		—		175,800		—
Equity Securities	Equity Securities	2,126		2,126		—		2,126		—		Equity Securities	2,126		2,126		—		2,126
Federal Home Loan Bank and Federal Reserve Bank Stock	Federal Home Loan Bank and Federal Reserve Bank Stock	4,720		4,720		—		4,720		—		Federal Home Loan Bank and Federal Reserve Bank Stock	4,720		4,720		—		4,720		—
Net Loans	Net Loans	2,895,562		2,714,587		—		—		2,714,587		Net Loans	2,895,562		2,714,587		—		—		2,714,587
Accrued Interest Receivable	Accrued Interest Receivable	8,549		8,549		—		8,549		—		Accrued Interest Receivable	8,549		8,549		—		8,549		—
Derivatives, included in other assets		8,508		8,508				8,508
Derivative Assets												Derivative Assets	8,508		8,508		—		8,508		—
Deposits	Deposits	3,795,105		3,785,960		—		3,785,960		—		Deposits	3,795,105		3,785,960		—		3,785,960		—

Federal Home Loan Bank Term Advances	Federal Home Loan Bank Term Advances	25,000		24,833		—		24,833		—		Federal Home Loan Bank Term Advances	25,000		24,833		—		24,833		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—		Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		—		20,000		—
Accrued Interest Payable	Accrued Interest Payable	202		202		—		202		—		Accrued Interest Payable	202		202		—		202		—
Derivatives, included in other liabilities		8,508		8,508		—		8,508		—

December 31, 2021
Cash and Cash Equivalents		$	457,696	$	457,696	$	457,696	$	—	$	—
Securities Available-for-Sale		559,316		559,316		—		559,316		—
Securities Held-to-Maturity		196,566		201,292		—		201,292		—
Equity Securities		1,747		1,747		—		1,747
Federal Home Loan Bank and Federal Reserve Bank Stock		5,380		5,380		—		5,380		—
Net Loans		2,640,660		2,618,311		—		—		2,618,311
Accrued Interest Receivable		7,384		7,384		—		7,384		—
Derivatives, included in other assets		2,083		2,083		—		2,083		—
Deposits		3,550,497		3,548,554		—		3,548,554		—

Federal Home Loan Bank Term Advances		45,000		45,518		—		45,518		—

Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts		20,000		20,000		—		20,000		—
Accrued Interest Payable		138		138		—		138		—
Derivatives, included in other liabilities		2,083		2,083		—		2,083		—

September 30, 2021
Cash and Cash Equivalents		$	598,366	$	598,366	$	598,366	$	—	$	—
Securities Available-for-Sale		486,900		486,900		—		486,900		—
Securities Held-to-Maturity		198,337		203,936		—		203,936		—
Equity Securities		1,886		1,886		—		1,886
Federal Home Loan Bank and Federal Reserve Bank Stock		5,380		5,380		—		5,380		—
Net Loans		2,627,795		2,632,843		—		—		2,632,843
Accrued Interest Receivable		7,899		7,899		—		7,899		—
Derivatives, included in other assets		2,287		2,287		—		2,287		—
Deposits		3,605,563		3,604,271		—		3,604,271		—
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase		2,426		2,426		—		2,426		—

Federal Home Loan Bank Term Advances		45,000		45,906		—		45,906		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts		20,000		20,000		—		20,000		—
Accrued Interest Payable		137		137		—		137		—
Derivatives, included in other liabilities		2,287		2,287		—		2,287		—
Derivative Liabilities												Derivative Liabilities	8,508		8,508		—		8,508		—

4044

Note ~~11.~~13. LEASES (Dollars In Thousands)

Arrow is a lessee in its leases, which are mainly for financial services locations in addition to leases for corporate vehicles. These leases generally require Arrow to pay third-party expenses on behalf of the Lessor, which are referred to as variable payments. Under some leases, Arrow pays the variable payments to the lessor, and in other leases, Arrow pays the variable payments directly to the applicable third party. None of Arrow's current leases include any residual value guarantees or any subleases, and there are no significant rights and obligations of Arrow for leases that have not commenced as of the reporting date.

Arrow leases two of its branch offices, at market rates, from Stewart’s Shops Corp. Mr. Gary C. Dake, President of Stewart’s Shops Corp., serves as a Director on the Board of Directors of Arrow ~~Glens Falls National~~ and Saratoga National. Arrow also leases one administrative office from an entity controlled by Elizabeth Miller, who serves as a Director on the Board of Directors of Arrow, Glens Falls National and Saratoga National.its two subsidiary banks.

The following includes quantitative data related to Arrow's leases as of and for the nine months ended September 30, ~~2022~~2023 and September 30, ~~2021:~~2022:


			Nine Months Ended								Nine Months Ended
Finance Lease Amounts:	Finance Lease Amounts:	Classification	September 30, 2022			September 30, 2021			Finance Lease Amounts:	Classification	September 30, 2023			September 30, 2022
Right-of-Use Assets	Right-of-Use Assets	Premises and Equipment, Net	$	4,681		$	4,859		Right-of-Use Assets	Premises and Equipment, Net	$	4,504		$	4,681
Lease Liabilities	Lease Liabilities	Finance Leases	5,131			5,181			Lease Liabilities	Finance Leases	5,080			5,131

Operating Lease Amounts:	Operating Lease Amounts:								Operating Lease Amounts:
Right-of-Use Assets	Right-of-Use Assets	Other Assets	$	5,889		$	6,786		Right-of-Use Assets	Other Assets	$	4,978		$	5,889
Lease Liabilities	Lease Liabilities	Other Liabilities	6,082			6,965			Lease Liabilities	Other Liabilities	5,179			6,082

Other Information:	Other Information:								Other Information:

Cash Paid For Amounts Included In The Measurement Of Lease Liabilities:	Cash Paid For Amounts Included In The Measurement Of Lease Liabilities:								Cash Paid For Amounts Included In The Measurement Of Lease Liabilities:
Operating Outgoing Cash Flows From Finance Leases	Operating Outgoing Cash Flows From Finance Leases		$	145		$	146		Operating Outgoing Cash Flows From Finance Leases		$	143		$	145
Operating Outgoing Cash Flows From Operating Leases	Operating Outgoing Cash Flows From Operating Leases		1,041			571			Operating Outgoing Cash Flows From Operating Leases		781			1,041
Financing Outgoing Cash Flows From Finance Leases	Financing Outgoing Cash Flows From Finance Leases		38			36			Financing Outgoing Cash Flows From Finance Leases		39			38
Right-of-Use Assets Obtained In Exchange For New Finance Lease Liabilities	Right-of-Use Assets Obtained In Exchange For New Finance Lease Liabilities		—			—			Right-of-Use Assets Obtained In Exchange For New Finance Lease Liabilities		—			—
Right-of-Use Assets Obtained In Exchange For New Operating Lease Liabilities	Right-of-Use Assets Obtained In Exchange For New Operating Lease Liabilities		—			2,126			Right-of-Use Assets Obtained In Exchange For New Operating Lease Liabilities		19			—
Weighted-average Remaining Lease Term - Finance Leases (Yrs.)	Weighted-average Remaining Lease Term - Finance Leases (Yrs.)		27.50			28.46			Weighted-average Remaining Lease Term - Finance Leases (Yrs.)		26.54			27.50
Weighted-average Remaining Lease Term - Operating Leases (Yrs.)	Weighted-average Remaining Lease Term - Operating Leases (Yrs.)		11.36			11.76			Weighted-average Remaining Lease Term - Operating Leases (Yrs.)		11.45			11.36
Weighted-average Discount Rate—Finance Leases	Weighted-average Discount Rate—Finance Leases		3.75		%	3.75		%	Weighted-average Discount Rate—Finance Leases		3.75		%	3.75		%
Weighted-average Discount Rate—Operating Leases	Weighted-average Discount Rate—Operating Leases		2.87		%	2.85		%	Weighted-average Discount Rate—Operating Leases		3.01		%	2.87		%


Lease cost information for Arrow's leases is as follows:	Lease cost information for Arrow's leases is as follows:									Lease cost information for Arrow's leases is as follows:
		Three Months Ended				Nine Months Ended					Three Months Ended				Nine Months Ended
		September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021			September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Lease Cost:	Lease Cost:									Lease Cost:
Finance Lease Cost:	Finance Lease Cost:									Finance Lease Cost:
Reduction of Right-of-Use Assets	Reduction of Right-of-Use Assets	$	44	$	44	$	133	$	133	Reduction of Right-of-Use Assets	$	44	$	44	$	132	$	133
Interest on Lease Liabilities	Interest on Lease Liabilities	48		48		145		146		Interest on Lease Liabilities	46		48		143		145
Operating Lease Cost	Operating Lease Cost	305		238		925		737		Operating Lease Cost	195		305		786		925
Short-term Lease Cost	Short-term Lease Cost	9		15		32		28		Short-term Lease Cost	11		9		46		32
Variable Lease Cost	Variable Lease Cost	86		69		253		203		Variable Lease Cost	58		86		179		253
Total Lease Cost	Total Lease Cost	$	492	$	414	$	1,488	$	1,247	Total Lease Cost	$	354	$	492	$	1,286	$	1,488

4145


Future Lease Payments at September 30, 2022 are as follows:
Future Lease Payments at September 30, 2023 are as follows:						Future Lease Payments at September 30, 2023 are as follows:
		Operating Leases		Financing Leases			Operating Leases		Financing Leases
Twelve Months Ended:	Twelve Months Ended:					Twelve Months Ended:
9/30/2023		$	1,077	$	243
9/30/2024	9/30/2024	723		247		9/30/2024	$	733	$	247
9/30/2025	9/30/2025	648		259		9/30/2025	653		259
9/30/2026	9/30/2026	590		268		9/30/2026	590		268
9/30/2027	9/30/2027	561		268		9/30/2027	561		268
9/30/2028						9/30/2028	486		268
Thereafter	Thereafter	3,698		7,331		Thereafter	3,212		7,063
Total Undiscounted Cash Flows	Total Undiscounted Cash Flows	$	7,297	$	8,616	Total Undiscounted Cash Flows	$	6,235	$	8,373
Less: Net Present Value Adjustment	Less: Net Present Value Adjustment	1,215		3,485		Less: Net Present Value Adjustment	1,056		3,293
Lease Liability	Lease Liability	$	6,082	$	5,131	Lease Liability	$	5,179	$	5,080

Note ~~12.~~14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (In Thousands)

Arrow is exposed to certain risks arising from both its business operations and economic conditions. Arrow principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. Arrow manages economic risks, including interest rate, primarily by managing the amount, sources and duration of its assets and liabilities and through the use of derivative instruments. Specifically, Arrow enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Arrow's derivative financial instruments are used to manage differences in the amount, timing and duration of known or expected cash receipts and its known or expected cash payments principally related to certain fixed rate borrowings. Arrow also has interest rate derivatives that result from a service provided to certain qualifying customers and, therefore, are not used to manage interest rate risk in ~~the Company’s~~Arrow's assets or liabilities. ~~The Company~~Arrow manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

Derivatives Not Designated as Hedging Instruments

Arrow enters into interest rate swap agreements with its commercial customers to provide them with a long-term fixed rate, while simultaneously entering into offsetting interest rate swap agreements with a counterparty to swap the fixed rate to a variable rate to manage interest rate exposure.

These interest rate swap agreements are not designated as a hedge for accounting purposes. As the interest rate swap agreements have substantially equivalent and offsetting terms, they do not present any material exposure to Arrow's consolidated statements of income. Arrow records its interest rate swap agreements at fair value and is presented on a gross basis within other assets and other liabilities on the consolidated balance sheets. Changes in the fair value of assets and liabilities arising from these derivatives are included, net, in other income in the consolidated statement of income.

The following table depicts the fair value adjustment recorded related to the notional amount of derivatives, not designated as hedging instruments, outstanding as well as the notional amount of the interest rate swap agreements:


Derivatives Not Designated as Hedging Instruments - Interest Rate Swap Agreements	Derivatives Not Designated as Hedging Instruments - Interest Rate Swap Agreements							Derivatives Not Designated as Hedging Instruments - Interest Rate Swap Agreements
		September 30, 2022		December 31, 2021		September 30, 2021			September 30, 2023		December 31, 2022		September 30, 2022
Fair value adjustment included in other assets	Fair value adjustment included in other assets	$	8,508	$	2,083	$	2,287	Fair value adjustment included in other assets	$	8,733	$	7,506	$	8,508
Fair value adjustment included in other liabilities	Fair value adjustment included in other liabilities	8,508		2,083		2,287		Fair value adjustment included in other liabilities	8,733		7,506		8,508
Notional amount	Notional amount	134,406		172,668		172,026		Notional amount	124,350		127,763		134,406

Derivatives Designated as Hedging Instruments

Arrow entered into two pay-fixed portfolio layer method fair value swaps, designated as hedging instruments, with a total notional amount of $250 million and $50 million, respectively, in the third quarter of 2023. Arrow is designating the fair value swaps under the portfolio layer method ("PLM"). Under PLM, the hedged items are designated as hedged layers of a closed portfolio of financial loans that are anticipated to remain outstanding for the designated hedged period. Adjustments will be made to record the swaps at fair value on the Consolidated Balance Sheets, with changes in fair value recognized in interest income. The carrying value of the fair value swaps on the Consolidated Balance Sheets will also be adjusted through interest income, based on changes in fair value attributable to changes in the hedged risk.

The following table depicts the fair value adjustment recorded related to the notional amount of derivatives, designed as hedging instruments, outstanding as well as the notional amount of the interest rate swap agreements:


Derivatives Designated as Hedging Instruments - Fair Value Agreements
	September 30, 2023		December 31, 2022		September 30, 2022
Fair value adjustment included in other assets	$	885	$	—	$	—
Fair value adjustment included in other liabilities	—		—		—
Notional amount	300,000		—		—

The following table summarizes the effect of the fair value hedging relationship recognized on the unaudited interim consolidated statement of income:


Derivatives Designated as Hedging Instruments - Fair Value Agreements
	Nine Months Ended		Twelve Months Ended		Nine Months Ended
	September 30, 2023		December 31, 2022		September 30, 2022
Hedged Asset	$	(758)	$	—	$	—
Fair value derivative designated as hedging instrument	885		—		—
Total gain recognized in the consolidated statements of income with interest and fees on loans	127		—		—

The following table represents the carrying value of the portfolio layer method hedged assets and the cumulative fair value hedging adjustment included in the carrying value of the hedged asset:


Derivatives Designated as Hedging Instruments - Fair Value Swap Agreements
	September 30, 2023		December 31, 2022		September 30, 2022
Carrying Value of Portfolio Layer Method Hedged Asset	$	299,242	$	—	$	—
Cumulative Fair Value Hedging Adjustment	(758)		—		—

Arrow has entered into interest rate swaps to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. These agreements are designated as cash flow hedges.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income (AOCI) and subsequently reclassified into interest expense in the same period during which the hedge transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on Arrow's Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts borrowings.

The following table indicates the effect of cash flow hedge accounting on AOCI and on the unaudited interim consolidated statement of income:


Derivatives Designated as Hedging Instruments - Cash Flow Hedge Agreements	Derivatives Designated as Hedging Instruments - Cash Flow Hedge Agreements							Derivatives Designated as Hedging Instruments - Cash Flow Hedge Agreements
		Nine Months Ended		Twelve Months Ended		Nine Months Ended			Nine Months Ended		Twelve Months Ended		Nine Months Ended
		September 30, 2022		December 31, 2021		September 30, 2021			September 30, 2023		December 31, 2022		September 30, 2022
Amount of gain recognized in AOCI		$	3,737	$	1,249	$	1,281
Amount of (loss) gain recognized in AOCI								Amount of (loss) gain recognized in AOCI	$	125	$	3,467	$	3,737
Amount of (loss) gain reclassified from AOCI to interest expense	Amount of (loss) gain reclassified from AOCI to interest expense	(57)		126		92		Amount of (loss) gain reclassified from AOCI to interest expense	(660)		(204)		(57)

Note ~~13. COVID-19 PANDEMIC~~15. RELATED PARTY TRANSACTIONS

The COVID-19 pandemic caused significant disruptions in the United States economy, which impacted the activities and operations of Arrow and its customers. The pandemic also caused disruption in the financial markets both globally and in the United States.

~~Arrow continues to monitor the impact~~A member of the ~~pandemic, both during recovery as well as any potential setbacks, including emerging variants,~~GFNB Board of Directors, is the Chief Executive Officer of the general contractor leading the multi-year renovation project to enhance and ~~continues~~improve the downtown Glens Falls Main Campus. The recently completed reconstruction provides added energy efficiency and more collaborative work space. Through September 30, 2023, Arrow paid $2.70 million to ~~mitigate the risk~~this general contractor. GFNB is a subsidiary of ~~harm to its employees and customers and to its operations. Arrow encourages customers to use contact-free alternatives such as digital banking and ATMs.~~Arrow.

4347

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Arrow Financial Corporation:

Results of Review of Interim Financial Information

We have reviewed the consolidated balance ~~sheet~~sheets of Arrow Financial Corporation and subsidiaries (the Company) as of September 30, 2023 and 2022, the related consolidated statements of income, comprehensive income, and changes in stockholders’ equity and cash flows for the ~~three-month~~three‑month and ~~nine-month~~nine‑month periods ended September 30, ~~2022~~2023 and ~~2021,~~2022, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, ~~2021,~~2022, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated ~~March 11, 2022,~~July 17, 2023, we expressed an unqualified opinion on those consolidated financial statements.In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, ~~2021,~~2022, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

~~Change in Accounting Principle~~

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2021 due to the adoption of Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses.

Basis for Review Results

This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ KPMG LLP

Albany, New York

November ~~7, 2022~~9, 2023

4448

Item 2.

ARROW FINANCIAL CORPORATION AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

September 30, ~~2022~~2023

NOTE ON TERMINOLOGY

In this ~~Quarterly~~ Report, ~~on Form 10-Q (this Report),~~ the terms "Arrow," "the registrant," "the Company," "we," "us," and "our" generally refer to Arrow Financial Corporation and its subsidiaries as a group, except where the context indicates otherwise. At certain points in this ~~Form 10-Q,~~Report, Arrow's performance is compared with that of the Company's "peer group" of financial institutions. Unless otherwise specifically stated, the peer group for the purposes of this ~~Form 10-Q~~Report is comprised of the group of ~~164~~176 domestic bank holding companies with $3 to $10 billion in total consolidated assets as identified in the Federal Reserve Board’s "Bank Holding Company Performance Report" for June 30, ~~2022~~2023 (the most recent such report currently available), and peer group data contained herein has been derived from such report.

THE COMPANY AND ITS SUBSIDIARIES

Arrow is a two-bank holding company headquartered in Glens Falls, New York. The banking subsidiaries are ~~Glens Falls National Bank and Trust Company (GFNB)~~GFNB, whose main office is located in Glens Falls, New York, and ~~Saratoga National Bank and Trust Company (SNB)~~SNB, whose main office is located in Saratoga Springs, New York. Active subsidiaries of ~~Glens Falls National~~GFNB include Upstate Agency, LLC (an insurance agency that sells property and casualty insurance and also specializes in selling and servicing group health care policies and life insurance), North Country Investment Advisers, Inc. (a registered investment adviser that provides investment advice to Arrow's proprietary mutual funds) and Arrow Properties, Inc. (a real estate investment trust, or REIT). Arrow also owns directly two subsidiary business trusts, organized in 2003 and 2004, which issued trust preferred securities (TRUPs), which are still outstanding.

~~FORWARD LOOKING~~FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this "Report") contains statements that are not historical in nature but rather are based on Arrow's beliefs, assumptions, expectations, estimates and projections about the future. These statements are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and involve a degree of uncertainty and attendant risk. Words such as "may," "will," "expect," "believe," "anticipate," "estimate," "continue," and variations of such words and similar expressions are intended to identify such forward-looking statements. Examples of forward-looking statements include statements regarding Arrow's asset quality, the level of allowance for credit losses, the sufficiency of liquidity sources, interest rate change exposure, changes in accounting standards, and Arrow's tax plans and strategies. Some of these statements, such as those included in the interest rate sensitivity analysis in Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," are merely presentations of what future performance or changes in future performance would look like based on hypothetical assumptions and on simulation models. Other forward-looking statements are based on Arrow's general perceptions of market conditions and trends in business activity, both Arrow's and in the banking industry generally, as well as current management strategies for future operations and development.

These forward-looking statements may not be exhaustive, are not guarantees of future performance and involve certain risks and uncertainties that are difficult to quantify or, in some cases, to identify. You should not place undue reliance on any such forward-looking statements. In the case of all forward-looking statements, our actual outcomes and results may differ materially from what the statements predict or forecast. Factors that could cause or contribute to such differences include, but are not limited to the following:

•~~the COVID-19 pandemic and its impact on economic, market and social conditions;~~

•Market conditions could present significant challenges to the U.S. commercial banking industry and its core business of making and servicing loans and any substantial downturn in the regional markets in which Arrow operates or in the U.S. economy generally could adversely affect Arrow's ability to maintain steady growth in the loan portfolio and earnings.

•A continued period of high inflation could adversely impact our business and our customers.

•Arrow operates in a highly competitive industry and market areas that could negatively affect growth and profitability.

•Uncertainty relating to the discontinuance of LIBOR and other ~~rapid~~reference rates and ~~dramatic~~their potential discontinuance may negatively impact our access to funding and the value of our financial instruments and commercial agreements.

•The financial services industry is faced with technological advances and changes on a continuing basis, and failure to adapt to these advances and changes could have a material adverse impact on Arrow's business.

•Problems encountered by other financial institutions could adversely affect Arrow.

•Any future economic or financial downturn, including any significant correction in the equity markets, may negatively affect the volume of income attributable to, and demand for, fee-based services of banks such as Arrow, including the Company's fiduciary business, which could negatively impact Arrow's financial condition and results of operations.

•Potential complications with the implementation of our new core banking system could adversely impact our business and operations.

•Arrow faces continuing and growing security risks to its information base including the information maintained relating to customers, and any breaches in the security systems implemented to protect this information could have a material negative effect on Arrow's business operations and financial condition.

•Business could suffer if Arrow loses key personnel unexpectedly or if employee wages increase significantly.

•COVID-19 or other health emergencies may adversely affect Arrow’s business activities, financial condition and results of operations.

•Arrow is subject to interest rate risk, which could adversely affect profitability.

•Arrow could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market ~~conditions;~~conditions deteriorate.

•Arrow's allowance for possible credit losses may be insufficient, and an increase in the allowance would reduce earnings.

•~~sharp fluctuations in interest rates, economic activity including inflation, or consumer spending patterns;~~Arrow’s financial condition and the results of its operations could be negatively impacted by liquidity management.

•~~sudden changes in the market for products provided, such as real estate loans;~~The increasing complexity of Arrow's operations presents varied risks that could affect earnings and financial condition.

•~~significant changes~~We have identified material weaknesses in our internal control over financial reporting which could, if not remediated, result in a material misstatement of our financial statements.

•The Company relies on the operations of its banking subsidiaries to provide liquidity, which, if limited, could impact Arrow's ability to pay dividends to its shareholders or to repurchase its common stock.

•Capital and liquidity standards require banks and bank holding companies to maintain more and higher quality capital and greater liquidity than has historically been the case.

•Federal banking statutes and regulations could change in the future, which may adversely affect Arrow.

•Non-compliance with the Patriot Act, Bank Secrecy Act, or other anti-money laundering laws and regulations ~~including both enactment of~~could result in fines or sanctions and restrictions on conducting acquisitions or establishing new ~~legal or regulatory measures or the modification or elimination of pre-existing measures;~~branches.

•~~significant changes in U.S. monetary or fiscal policy, including new or revised stimulus programs or targets adopted or announced by~~Arrow, through its banking subsidiaries, is subject to the ~~Federal Reserve ("monetary tightening or easing") or significant new federal legislation materially affecting the federal budget ("fiscal tightening or expansion");~~CRA and fair lending laws, and failure to comply with these laws could lead to material penalties.

•~~competition from other sources (e.g., non-bank entities);~~

•~~similar uncertainties inherent~~Disruption in ~~banking operations or~~the continuity, timing and effectiveness of the recent transition in executive management could adversely affect Arrow's business ~~generally, including technological developments~~activities, financial conditional and ~~changes; and,~~

•~~other risks detailed from time to time within our filings with the Securities and Exchange Commission (SEC).~~results of operations.

Arrow is under no duty to update any of the forward-looking statements after the date of this Report to conform such statements to actual results. All forward-looking statements, express or implied, included in this Report and the documents incorporated by reference and that are attributable to Arrow are expressly qualified in their entirety by this cautionary statement. This cautionary statement should also be considered in connection with any subsequent written or oral forward-looking statements that Arrow or any persons acting on its behalf may issue. This Report should be read in conjunction with ~~our Annual Report on~~the 2022 Form 10-K ~~for the year ended December 31, 2021 (the 2021 Annual Report)~~ and our other filings with the SEC.

4550

USE OF NON-GAAP FINANCIAL MEASURES

The SEC has adopted Regulation G, which applies to certain public disclosures, including earnings releases, made by registered companies that contain "non-GAAP financial measures." GAAP is generally accepted accounting principles in the United States of America. Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of Arrow's reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of "non-GAAP financial measures" certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. The following measures used in this Report, which are commonly utilized by financial institutions, have not been specifically exempted by the SEC and may constitute "non-GAAP financial measures" within the meaning of the SEC's rules, although Arrow is unable to state with certainty that the SEC would so regard them.

Tax-Equivalent Net Interest Income and Net Interest Margin: Net interest income, as a component of the tabular presentation by financial institutions of Selected Financial Information regarding their recently completed operations, as well as disclosures based on that tabular presentation, is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the actual before-tax net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income to that of another institution or in analyzing any institution’s net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities, and from the fact that even a single institution may significantly alter over time the proportion of its own portfolio that is invested in tax-exempt obligations. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average earning assets. For purposes of this measure as well, tax-equivalent net interest income is generally used by financial institutions, again to provide a better basis of comparison from institution to institution and to better demonstrate a single institution’s performance over time. Arrow follows these practices.

The Efficiency Ratio: Financial institutions often use an "efficiency ratio" as a measure of expense control. The efficiency ratio typically is defined as the ratio of ~~noninterest~~non-interest expense to net interest income and ~~noninterest~~non-interest income. Net interest income as utilized in calculating the efficiency ratio is typically the same as the net interest income presented in Selected Financial Information table discussed in the preceding paragraph, i.e., it is expressed on a tax-equivalent basis. Moreover, many financial institutions, in calculating the efficiency ratio, also adjust both ~~noninterest~~non-interest expense and ~~noninterest~~non-interest income to exclude from these items (as calculated under GAAP) certain recurring component elements of income and expense, such as intangible asset amortization (which is included in ~~noninterest~~non-interest expense under GAAP but may be excluded therefrom for purposes of calculating the efficiency ratio) and securities gains or losses (which are reflected in the calculation of ~~noninterest~~non-interest income under GAAP but may be excluded therefrom for purposes of calculating the efficiency ratio). Arrow makes these adjustments.

Tangible Book Value per Share: Tangible equity is total stockholders’ equity less intangible assets. Tangible book value per share is tangible equity divided by total shares issued and outstanding. Tangible book value per share is often regarded as a more meaningful comparative ratio than book value per share as calculated under GAAP, that is, total stockholders’ equity including intangible assets divided by total shares issued and outstanding. Intangible assets include many items, but in Arrow's case, essentially represents goodwill.

Adjustments for Certain Items of Income or Expense: In addition to our regular utilization in our public filings and disclosures of the various non-GAAP measures commonly utilized by financial institutions discussed above, Arrow may also elect from time to time, in connection with our presentation of various financial measures prepared in accordance with GAAP, such as net income, ~~earnings per share (EPS),~~EPS, return on average assets (ROA), and return on average equity (ROE), to provide as well certain comparative disclosures that adjust these GAAP financial measures, typically by removing them from the impact of certain transactions or other material items of income or expense that are unusual or unlikely to be repeated. Arrow will do so only if it believes that provision of the resulting non-GAAP financial measures may improve the average investor's understanding of our results of operations by separating out items that have a disproportional positive or negative impact on the particular period in question or by otherwise permitting a better comparison from period-to-period in our results of operations with respect to our fundamental lines of business, including the commercial banking business.

Arrow believes that the non-GAAP financial measures disclosed from time-to-time are useful in evaluating our performance and that such information should be considered as supplemental in nature, and not as a substitute for, or superior to, the related financial information prepared in accordance with GAAP. Non-GAAP financial measures may differ from similar measures presented by other companies.

4651

Arrow Financial Corporation

Selected Quarterly Information

(Dollars In Thousands, Except Per Share Amounts - Unaudited)


Quarter Ended	Quarter Ended	9/30/2022			6/30/2022			3/31/2022			12/31/2021			9/30/2021			Quarter Ended	9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Net Income	Net Income	$	12,163		$	11,974		$	12,575		$	10,309		$	12,989		Net Income	$	7,743		$	6,047		$	8,562		$	12,087		$	12,163
Transactions in Net Income (Net of Tax):	Transactions in Net Income (Net of Tax):																Transactions in Net Income (Net of Tax):

Net Changes in Fair Value of Equity Investments	Net Changes in Fair Value of Equity Investments	70			114			96			(104)			(79)			Net Changes in Fair Value of Equity Investments	52			(133)			(76)			35			70

Share and Per Share Data:1	Share and Per Share Data:1																Share and Per Share Data:1
Period End Shares Outstanding	Period End Shares Outstanding	16,523			16,503			16,493			16,522			16,500			Period End Shares Outstanding	17,049			17,050			17,050			17,048			17,019
Basic Average Shares Outstanding	Basic Average Shares Outstanding	16,512			16,494			16,511			16,509			16,508			Basic Average Shares Outstanding	17,050			17,050			17,048			17,031			17,007
Diluted Average Shares Outstanding	Diluted Average Shares Outstanding	16,558			16,535			16,566			16,574			16,568			Diluted Average Shares Outstanding	17,050			17,050			17,060			17,087			17,054
Basic Earnings Per Share	Basic Earnings Per Share	$	0.74		$	0.72		$	0.76		$	0.62		$	0.79		Basic Earnings Per Share	$	0.46		$	0.35		$	0.50		$	0.71		$	0.72
Diluted Earnings Per Share	Diluted Earnings Per Share	0.74			0.72			0.76			0.61			0.78			Diluted Earnings Per Share	0.46			0.35			0.50			0.71			0.72
Cash Dividend Per Share	Cash Dividend Per Share	0.262			0.262			0.262			0.252			0.245			Cash Dividend Per Share	0.262			0.262			0.262			0.262			0.255

Selected Quarterly Average Balances:	Selected Quarterly Average Balances:																Selected Quarterly Average Balances:
Interest-Bearing Deposits at Banks		$	209,001		$	232,545		$	410,644		$	551,890		$	416,500
Interest-bearing Deposits at Banks																	Interest-bearing Deposits at Banks	$	131,814		$	130,057		$	40,436		$	143,499		$	209,001
Investment Securities	Investment Securities	821,052			822,112			797,347			681,732			675,980			Investment Securities	745,693			787,175			813,461			845,859			821,052
Loans	Loans	2,872,066			2,804,180			2,678,796			2,660,665			2,641,726			Loans	3,096,240			3,036,410			2,991,928			2,951,547			2,872,066
Deposits	Deposits	3,598,519			3,569,754			3,582,256			3,590,766			3,435,933			Deposits	3,491,028			3,460,711			3,480,279			3,614,945			3,598,519
Other Borrowed Funds	Other Borrowed Funds	50,125			50,140			68,596			70,162			72,187			Other Borrowed Funds	208,527			220,616			100,596			63,304			50,125
Stockholders’ Equity	Stockholders’ Equity	361,675			357,228			370,264			364,409			359,384			Stockholders’ Equity	362,701			365,070			359,556			351,402			361,675
Total Assets	Total Assets	4,047,738			4,012,999			4,054,943			4,060,540			3,902,041			Total Assets	4,109,995			4,087,653			3,978,851			4,074,028			4,047,738
Return on Average Assets, annualized	Return on Average Assets, annualized	1.19		%	1.20		%	1.26		%	1.01		%	1.32		%	Return on Average Assets, annualized	0.75		%	0.59		%	0.87		%	1.18		%	1.19		%
Return on Average Equity, annualized	Return on Average Equity, annualized	13.34		%	13.44		%	13.77		%	11.22		%	14.34		%	Return on Average Equity, annualized	8.47		%	6.64		%	9.66		%	13.65		%	13.34		%
Return on Average Tangible Equity, annualized 2	Return on Average Tangible Equity, annualized 2	14.27		%	14.40		%	14.72		%	12.01		%	15.36		%	Return on Average Tangible Equity, annualized 2	9.05		%	7.10		%	10.33		%	14.62		%	14.27		%
Average Earning Assets	Average Earning Assets	$	3,902,119		$	3,858,837		$	3,886,787		$	3,894,287		$	3,734,206		Average Earning Assets	$	3,973,747		$	3,953,642		$	3,845,825		$	3,940,905		$	3,902,119
Average Paying Liabilities	Average Paying Liabilities	2,781,985			2,808,287			2,855,884			2,841,304			2,705,283			Average Paying Liabilities	2,920,518			2,924,743			2,782,299			2,891,092			2,781,985
Interest Income	Interest Income	34,207			30,593			28,947			28,354			29,807			Interest Income	42,117			40,013			36,110			35,904			34,207
Tax-Equivalent Adjustment 3	Tax-Equivalent Adjustment 3	268			269			270			285			292			Tax-Equivalent Adjustment 3	183			196			202			279			268
Interest Income, Tax-Equivalent 3	Interest Income, Tax-Equivalent 3	34,475			30,862			29,217			28,639			30,099			Interest Income, Tax-Equivalent 3	42,300			40,209			36,312			36,183			34,475
Interest Expense	Interest Expense	3,306			1,555			1,122			1,152			1,169			Interest Expense	16,764			14,241			8,016			5,325			3,306
Net Interest Income	Net Interest Income	30,901			29,038			27,825			27,202			28,638			Net Interest Income	25,353			25,772			28,094			30,579			30,901
Net Interest Income, Tax-Equivalent 3	Net Interest Income, Tax-Equivalent 3	31,169			29,307			28,095			27,487			28,930			Net Interest Income, Tax-Equivalent 3	25,536			25,968			28,296			30,858			31,169
Net Interest Margin, annualized	Net Interest Margin, annualized	3.14		%	3.02		%	2.90		%	2.77		%	3.04		%	Net Interest Margin, annualized	2.53		%	2.61		%	2.96		%	3.08		%	3.14		%
Net Interest Margin, Tax Equivalent, annualized 3	Net Interest Margin, Tax Equivalent, annualized 3	3.17		%	3.05		%	2.93		%	2.80		%	3.07		%	Net Interest Margin, Tax Equivalent, annualized 3	2.55		%	2.63		%	2.98		%	3.11		%	3.17		%

Efficiency Ratio Calculation: 4	Efficiency Ratio Calculation: 4																Efficiency Ratio Calculation: 4
Noninterest Expense		$	21,448		$	20,345		$	18,945		$	20,860		$	19,423
Non-Interest Expense																	Non-Interest Expense	$	23,479		$	24,083		$	22,296		$	20,792		$	21,448
Less: Intangible Asset Amortization	Less: Intangible Asset Amortization	48			48			49			52			51			Less: Intangible Asset Amortization	43			44			45			47			48
Net Noninterest Expense		$	21,400		$	20,297		$	18,896		$	20,808		$	19,372
Net Non-Interest Expense																	Net Non-Interest Expense	$	23,436		$	24,039		$	22,251		$	20,745		$	21,400
Net Interest Income, Tax-Equivalent 3	Net Interest Income, Tax-Equivalent 3	$	31,169		$	29,307		$	28,095		$	27,487		$	28,930		Net Interest Income, Tax-Equivalent 3	$	25,536		$	25,968		$	28,296		$	30,858		$	31,169
Noninterest Income		7,827			7,744			8,162			7,589			7,694
Non-Interest Income																	Non-Interest Income	8,050			6,906			6,677			7,165			7,827

Less: Net Changes in Fair Value of Equity Invest.	Less: Net Changes in Fair Value of Equity Invest.	95			154			130			(139)			(106)			Less: Net Changes in Fair Value of Equity Invest.	71			(181)			(104)			48			95
Net Gross Income	Net Gross Income	$	38,901		$	36,897		$	36,127		$	35,215		$	36,730		Net Gross Income	$	33,515		$	33,055		$	35,077		$	37,975		$	38,901
Efficiency Ratio 4	Efficiency Ratio 4	55.01		%	55.01		%	52.30		%	59.09		%	52.74		%	Efficiency Ratio 4	69.93		%	72.72		%	63.43		%	54.63		%	55.01		%

Period-End Capital Information:	Period-End Capital Information:																Period-End Capital Information:
Total Stockholders’ Equity (i.e. Book Value)	Total Stockholders’ Equity (i.e. Book Value)	$	345,550		$	356,498		$	357,243		$	371,186		$	360,171		Total Stockholders’ Equity (i.e. Book Value)	$	360,014		$	361,443		$	363,371		$	353,538		$	345,550
Book Value per Share 1	Book Value per Share 1	20.91			21.60			21.66			22.47			21.83			Book Value per Share 1	21.12			21.20			21.31			20.74			20.30
Goodwill and Other Intangible Assets, net	Goodwill and Other Intangible Assets, net	23,477			23,583			23,691			23,791			23,879			Goodwill and Other Intangible Assets, net	23,078			23,175			23,273			23,373			23,477
Tangible Book Value per Share 1,2	Tangible Book Value per Share 1,2	19.49			20.17			20.22			21.03			20.38			Tangible Book Value per Share 1,2	19.76			19.84			19.95			19.37			18.92

Capital Ratios:5	Capital Ratios:5																Capital Ratios:5

Tier 1 Leverage Ratio	Tier 1 Leverage Ratio	9.71		%	9.60		%	9.37		%	9.20		%	9.39		%	Tier 1 Leverage Ratio	9.94		%	9.92		%	10.13		%	9.80		%	9.71		%
Common Equity Tier 1 Capital Ratio	Common Equity Tier 1 Capital Ratio	13.14		%	13.14		%	13.48		%	13.77		%	13.71		%	Common Equity Tier 1 Capital Ratio	13.17		%	13.27		%	13.34		%	13.32		%	13.14		%
Tier 1 Risk-Based Capital Ratio	Tier 1 Risk-Based Capital Ratio	13.85		%	13.86		%	14.23		%	14.55		%	14.51		%	Tier 1 Risk-Based Capital Ratio	13.84		%	13.96		%	14.03		%	14.01		%	13.85		%
Total Risk-Based Capital Ratio	Total Risk-Based Capital Ratio	14.93		%	14.93		%	15.33		%	15.69		%	15.66		%	Total Risk-Based Capital Ratio	14.94		%	15.08		%	15.15		%	15.11		%	14.93		%

Assets Under Trust Admin. & Investment Mgmt.	Assets Under Trust Admin. & Investment Mgmt.	$	1,515,994		$	1,589,178		$	1,793,747		$	1,851,101		$	1,778,659		Assets Under Trust Admin. & Investment Mgmt.	$	1,627,522		$	1,711,460		$	1,672,117		$	1,606,132		$	1,515,994

4752

Arrow Financial Corporation

Selected Quarterly Information - Continued

(Dollars In Thousands, Except Per Share Amounts - Unaudited)


Footnotes:	Footnotes:																	Footnotes:

1.	1.	Share and Per Share Data have been restated for the September 23, 2022, 3% stock dividend.																1.	Share and Per Share Data have been restated for the September 26, 2023, 3% stock dividend.

2.	2.	Non-GAAP Financial Measures Reconciliation: Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which Arrow believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 46.																2.	Non-GAAP Financial Measures Reconciliation: Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which Arrow believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 51.
			9/30/2022			6/30/2022			3/31/2022			12/31/2021			9/30/2021					9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
		Total Stockholders' Equity (GAAP)	$	345,550		$	356,498		$	357,243		$	371,186		$	360,171			Total Stockholders' Equity (GAAP)	$	360,014		$	361,443		$	363,371		$	353,538		$	345,550
		Less: Goodwill and Other Intangible assets, net	23,477			23,583			23,691			23,791			23,879				Less: Goodwill and Other Intangible assets, net	23,078			23,175			23,273			23,373			23,477
		Tangible Equity (Non-GAAP)	$	322,073		$	332,915		$	333,552		$	347,395		$	336,292			Tangible Equity (Non-GAAP)	$	336,936		$	338,268		$	340,098		$	330,165		$	322,073

		Period End Shares Outstanding	16,523			16,503			16,493			16,522			16,500				Period End Shares Outstanding	17,049			17,050			17,050			17,048			17,019
		Tangible Book Value per Share (Non-GAAP)	$	19.49		$	20.17		$	20.22		$	21.03		$	20.38			Tangible Book Value per Share (Non-GAAP)	$	19.76		$	19.84		$	19.95		$	19.37		$	18.92
		Net Income	12,163			11,974			12,575			10,309			12,989				Net Income	7,743			6,047			8,562			12,087			12,163
		Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized)	14.27		%	14.40		%	14.72		%	12.01		%	15.36		%		Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized)	9.05		%	7.10		%	10.33		%	14.62		%	14.27		%

3.	3.	Non-GAAP Financial Measures Reconciliation: Net Interest Margin, Tax-Equivalent is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 46.																3.	Non-GAAP Financial Measures Reconciliation: Net Interest Margin, Tax-Equivalent is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 51.
			9/30/2022			6/30/2022			3/31/2022			12/31/2021			9/30/2021					9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
		Interest Income (GAAP)	$	34,207		$	30,593		$	28,947		$	28,354		$	29,807			Interest Income (GAAP)	$	42,117		$	40,013		$	36,110		$	35,904		$	34,207
		Add: Tax-Equivalent adjustment (Non-GAAP)	268			269			270			285			292				Add: Tax-Equivalent adjustment (Non-GAAP)	183			196			202			279			268
		Interest Income - Tax Equivalent (Non-GAAP)	$	34,475		$	30,862		$	29,217		$	28,639		$	30,099			Interest Income - Tax Equivalent (Non-GAAP)	$	42,300		$	40,209		$	36,312		$	36,183		$	34,475
		Net Interest Income (GAAP)	$	30,901		$	29,038		$	27,825		$	27,202		$	28,638			Net Interest Income (GAAP)	$	25,353		$	25,772		$	28,094		$	30,579		$	30,901
		Add: Tax-Equivalent adjustment (Non-GAAP)	268			269			270			285			292				Add: Tax-Equivalent adjustment (Non-GAAP)	183			196			202			279			268
		Net Interest Income - Tax Equivalent (Non-GAAP)	$	31,169		$	29,307		$	28,095		$	27,487		$	28,930			Net Interest Income - Tax Equivalent (Non-GAAP)	$	25,536		$	25,968		$	28,296		$	30,858		$	31,169
		Average Earning Assets	$	3,902,119		$	3,858,837		$	3,886,787		$	3,894,287		$	3,734,206			Average Earning Assets	$	3,973,747		$	3,953,642		$	3,845,825		$	3,940,905		$	3,902,119
		Net Interest Margin (Non-GAAP)*	3.17		%	3.05		%	2.93		%	2.80		%	3.07		%		Net Interest Margin (Non-GAAP)*	2.55		%	2.63		%	2.98		%	3.11		%	3.17		%

4.	4.	Non-GAAP Financial Measures: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. Arrow believes that the efficiency ratio provides investors with information that is useful in understanding our financial performance. Arrow defines efficiency ratio as the ratio of our noninterest expense to our net gross income (which equals tax-equivalent net interest income plus noninterest income, as adjusted). There is no GAAP financial measure that is closely comparable to the efficiency ratio. See "Use of Non-GAAP Financial Measures" on page 46.																4.	Non-GAAP Financial Measures: Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. Arrow believes that the efficiency ratio provides investors with information that is useful in understanding our financial performance. Arrow defines efficiency ratio as the ratio of our non-interest expense to our net gross income (which equals tax-equivalent net interest income plus non-interest income, as adjusted). There is no GAAP financial measure that is closely comparable to the efficiency ratio. See "Use of Non-GAAP Financial Measures" on page 51.

5.	5.	For the current quarter, all of the regulatory capital ratios in the table above, as well as the Total Risk-Weighted Assets and Common Equity Tier 1 (CET1) Capital amounts listed in the table below, are estimates based on, and calculated in accordance with, bank regulatory capital rules. All prior quarters reflect actual results. The CET1 ratio at September 30, 2022 listed in the tables (i.e., 13.14%) exceeds the sum of the required minimum CET1 ratio plus the fully phased-in Capital Conservation Buffer (i.e., 7.00%).																5.	For the current quarter, all of the regulatory capital ratios as well as the Total Risk-Weighted Assets are calculated in accordance with bank regulatory capital rules. The September 30, 2023 CET1 ratio listed in the tables (i.e., 13.17%) exceeds the sum of the required minimum CET1 ratio plus the fully phased-in Capital Conservation Buffer (i.e., 7.00%).
			9/30/2022			6/30/2022			3/31/2022			12/31/2021			9/30/2021					9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022

		Total Risk Weighted Assets	$	2,856,224		$	2,790,520		$	2,661,952		$	2,552,812		$	2,511,910			Total Risk Weighted Assets	$	2,988,438		$	2,937,837		$	2,909,610		$	2,883,902		$	2,856,224
		Common Equity Tier 1 Capital	375,394			366,798			358,738			351,497			344,507				Common Equity Tier 1 Capital	393,541			389,966			388,228			384,003			375,394
		Common Equity Tier 1 Capital Ratio	13.14		%	13.14		%	13.48		%	13.77		%	13.71		%		Common Equity Tier 1 Capital Ratio	13.17		%	13.27		%	13.34		%	13.32		%	13.14		%

* Quarterly ratios have been annualized.	* Quarterly ratios have been annualized.																	* Quarterly ratios have been annualized.

4853

Arrow Financial Corporation

Selected Year-to-Date Information

(Dollars In Thousands, Except Per Share Amounts - Unaudited)

Nine Months Ended 9/30/2022 9/30/2021
Net Income $ 36,712 $ 39,548
Transactions Recorded in Net Income (Net of Tax):
Net Changes in Fair Value of Equity Investments 280 186
Share and Per Share Data: 1

Period End Shares Outstanding 16,523 16,500
Basic Average Shares Outstanding 16,506 16,495
Diluted Average Shares Outstanding 16,553 16,554
Basic Earnings Per Share $ 2.22 $ 2.40
Diluted Earnings Per Share 2.22 2.39
Cash Dividend Per Share 0.79 0.74
Selected Year-to-Date Average Balances:
  Interest-Bearing Deposits at Banks $ 289,681 $ 373,531
  Investment Securities 813,590 646,264
  Loans 2,785,721 2,637,265
  Deposits 3,583,570 3,362,670
  Other Borrowed Funds 56,219 76,563
  Stockholders’ Equity 363,024 350,167
  Total Assets 4,038,533 3,822,689
Return on Average Assets, annualized 1.22 % 1.38 %
Return on Average Equity, annualized 13.52 % 15.10 %
Return on Average Tangible Equity, annualized 2
14.46 % 16.21 %
Average Earning Assets 3,888,992 3,657,060
Average Paying Liabilities 2,815,115 2,689,070
Interest Income 93,747 87,196
Tax-Equivalent Adjustment 3
807 820
Interest Income, Tax-Equivalent 3
94,554 88,016
Interest Expense 5,983 4,043
Net Interest Income 87,764 83,153
Net Interest Income, Tax-Equivalent 3
88,571 83,973
Net Interest Margin, annualized 3.02 % 3.04 %
Net Interest Margin, Tax Equivalent, annualized 3
3.04 % 3.07 %
Efficiency Ratio Calculation: 4

Noninterest Expense $ 60,738 $ 57,188
Less: Intangible Asset Amortization 145 158
Net Noninterest Expense 60,593 57,030
Net Interest Income, Tax-Equivalent 3
88,571 83,973
Noninterest Income 23,733 24,780
Less: Net Changes in Fair Value of Equity Securities 379 250
Net Gross Income 111,925 108,503
Efficiency Ratio 4
54.14 % 52.56 %


Nine Months Ended	9/30/2023			9/30/2022
Net Income	$	22,352		$	36,712
Transactions Recorded in Net Income (Net of Tax):
Net Changes in Fair Value of Equity Investments	(157)			281

Share and Per Share Data: 1
Period End Shares Outstanding	17,049			17,019
Basic Average Shares Outstanding	17,049			17,001
Diluted Average Shares Outstanding	17,049			17,050
Basic Earnings Per Share	$	1.31		$	2.16
Diluted Earnings Per Share	1.31			2.15
Cash Dividend Per Share	0.79			0.76

Selected Year-to-Date Average Balances:
Interest-bearing Deposits at Banks	$	101,104		$	289,681
Investment Securities	781,862			813,590
Loans	3,041,909			2,785,721
Deposits	3,477,379			3,583,570
Borrowings	176,975			56,219
Stockholders’ Equity	362,454			363,024
Total Assets	4,059,314			4,038,533
Return on Average Assets, annualized	0.74		%	1.22		%
Return on Average Equity, annualized	8.25		%	13.52		%
Return on Average Tangible Equity, annualized 2	8.81		%	14.46		%
Average Earning Assets	3,924,875			3,888,992
Average Paying Liabilities	2,876,360			2,815,115
Interest Income	118,240			93,747
Tax-Equivalent Adjustment 3	581			807
Interest Income, Tax-Equivalent 3	118,821			94,554
Interest Expense	39,021			5,983
Net Interest Income	79,219			87,764
Net Interest Income, Tax-Equivalent 3	79,800			88,571
Net Interest Margin, annualized	2.70		%	3.02		%
Net Interest Margin, Tax Equivalent, annualized 3	2.72		%	3.04		%

Efficiency Ratio Calculation: 4
Noninterest Expense	$	69,858		$	60,738
Less: Intangible Asset Amortization	133			144
Net Noninterest Expense	69,725			60,594
Net Interest Income, Tax-Equivalent 3	79,800			88,571
Noninterest Income	21,633			23,733

Less: Net Changes in Fair Value of Equity Securities	(214)			379
Net Gross Income	101,647			111,925
Efficiency Ratio 4	68.60		%	54.14		%

4954

Arrow Financial Corporation

Selected Year-to-Date Information - Continued

(Dollars In Thousands, Except Per Share Amounts - Unaudited)

Footnotes:
1. Share and Per Share Data have been restated for the September 23, 2022, 3% stock dividend.
2. Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which Arrow believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 46.
9/30/2022 9/30/2021
Total Stockholders' Equity (GAAP) $ 345,550 $ 360,171
Less: Goodwill and Other Intangible assets, net 23,477 23,879
Tangible Equity (Non-GAAP) $ 322,073 $ 336,292
Period End Shares Outstanding 16,523 16,500
Tangible Book Value per Share (Non-GAAP) $ 19.49 $ 20.38
Net Income 36,712 39,548
Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized) 14.46 % 16.21 %
3. Net Interest Margin is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 46.
9/30/2022 9/30/2021
Interest Income (GAAP) $ 93,747 $ 87,196
Add: Tax-Equivalent adjustment (Non-GAAP) 806 820
Net Interest Income - Tax Equivalent (Non-GAAP) 94,553 88,016
Net Interest Income (GAAP) 87,764 83,153
Add: Tax-Equivalent adjustment (Non-GAAP) 806 820
Net Interest Income - Tax Equivalent (Non-GAAP) $ 88,570 $ 83,973
Average Earning Assets $ 3,888,992 $ 3,657,060
Net Interest Margin (Non-GAAP)* 3.04 % 3.07 %
4. Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. Arrow believes the efficiency ratio provides investors with information that is useful in understanding financial performance. The efficiency ratio is defined as the ratio of our noninterest expense to our net gross income (which equals our tax-equivalent net interest income plus noninterest income, as adjusted). See "Use of Non-GAAP Financial Measures" on page 46.
* Year-to-date ratios have been annualized.


Footnotes:

1.	Share and Per Share Data have been restated for the September 26, 2023, 3% stock dividend.

2.	Tangible Book Value, Tangible Equity and Return on Tangible Equity exclude goodwill and other intangible assets, net from total equity. These are non-GAAP financial measures which Arrow believes provide investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 51.
		9/30/2023			9/30/2022
	Total Stockholders' Equity (GAAP)	$	360,014		$	345,550
	Less: Goodwill and Other Intangible assets, net	23,078			23,477
	Tangible Equity (Non-GAAP)	$	336,936		$	322,073

	Period End Shares Outstanding	17,049			17,019
	Tangible Book Value per Share (Non-GAAP)	$	19.76		$	18.92
	Net Income	22,352			36,712
	Return on Average Tangible Equity (Net Income/Tangible Equity - Annualized)	8.81		%	14.46		%

3.	Net Interest Margin is the ratio of our annualized tax-equivalent net interest income to average earning assets. This is also a non-GAAP financial measure which Arrow believes provides investors with information that is useful in understanding our financial performance. See "Use of Non-GAAP Financial Measures" on page 51.
		9/30/2023			9/30/2022
	Interest Income (GAAP)	$	118,240		$	93,747
	Add: Tax-Equivalent adjustment (Non-GAAP)	580			807
	Interest Income - Tax Equivalent (Non-GAAP)	$	118,820		$	94,554
	Net Interest Income (GAAP)	79,219			87,764
	Add: Tax-Equivalent adjustment (Non-GAAP)	580			807
	Net Interest Income - Tax Equivalent (Non-GAAP)	$	79,799		$	88,571
	Average Earning Assets	$	3,924,875		$	3,888,992
	Net Interest Margin (Non-GAAP)*	2.72		%	3.04		%

4.	Financial Institutions often use the "efficiency ratio", a non-GAAP ratio, as a measure of expense control. Arrow believes the efficiency ratio provides investors with information that is useful in understanding financial performance. The efficiency ratio is defined as the ratio of our non-interest expense to our net gross income (which equals our tax-equivalent net interest income plus non-interest income, as adjusted). See "Use of Non-GAAP Financial Measures" on page 51.

* Year-to-date ratios have been annualized.

5055

Average Consolidated Balance Sheets and Net Interest Income Analysis
(Dollars In Thousands)
Quarter Ended September 30: 2022 2021
Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
Interest-Bearing Deposits at Banks $ 209,001 $ 1,201 2.28 % $ 416,500 $ 163 0.16 %
Investment Securities:
Fully Taxable 651,899 2,603 1.58 494,869 1,632 1.31
Exempt from Federal Taxes 169,153 785 1.84 181,111 855 1.87
Loans 2,872,066 29,618 4.09 2,641,726 27,157 4.08
Total Earning Assets 3,902,119 34,207 3.48 3,734,206 29,807 3.17
Allowance for Credit Losses (28,006) (27,040)
Cash and Due From Banks 32,475 38,036
Other Assets 141,150 156,839
Total Assets $ 4,047,738 $ 3,902,041
Deposits:
Interest-Bearing Checking Accounts $ 996,116 267 0.11 $ 923,002 155 0.07
Savings Deposits 1,549,451 2,469 0.63 1,496,938 424 0.11
Time Deposits of $250,000 or More 49,459 89 0.71 71,435 39 0.22
Other Time Deposits 136,834 150 0.43 141,721 133 0.37
Total Interest-Bearing Deposits 2,731,860 2,975 0.43 2,633,096 751 0.11
Short-Term Borrowings — — 2,012 — —
FHLBNY Term Advances & Other Long-Term Debt 45,000 283 2.50 65,000 370 2.26
Finance Leases 5,125 48 3.72 5,175 48 3.68
Total Interest-Bearing Liabilities 2,781,985 3,306 0.47 2,705,283 1,169 0.17
Noninterest-bearing deposits 866,659 802,837
Other Liabilities 37,419 34,537
Total Liabilities 3,686,063 3,542,657
Stockholders’ Equity 361,675 359,384
Total Liabilities and Stockholders’ Equity $ 4,047,738 $ 3,902,041
Net Interest Income $ 30,901 $ 28,638
Net Interest Spread 3.01 % 3.00 %
Net Interest Margin 3.14 % 3.04 %


Average Consolidated Balance Sheets and Net Interest Income Analysis	Average Consolidated Balance Sheets and Net Interest Income Analysis													Average Consolidated Balance Sheets and Net Interest Income Analysis
(GAAP Basis)

(Dollars In Thousands)	(Dollars In Thousands)													(Dollars In Thousands)

Nine Months Ended September 30:		2022						2021
Three Months Ended September 30:														Three Months Ended September 30:	2023						2022
				Interest		Rate				Interest		Rate					Interest		Rate				Interest		Rate
		Average		Income/		Earned/		Average		Income/		Earned/			Average		Income/		Earned/		Average		Income/		Earned/
		Balance		Expense		Paid		Balance		Expense		Paid			Balance		Expense		Paid		Balance		Expense		Paid
Interest-Bearing Deposits at Banks	Interest-Bearing Deposits at Banks	$	289,681	$	1,826	0.84	%	$	373,531	$	351	0.13	%	Interest-Bearing Deposits at Banks	$	131,814	$	1,805	5.43	%	$	209,001	$	1,201	2.28
Investment Securities:	Investment Securities:													Investment Securities:
Fully Taxable	Fully Taxable	638,504		7,236		1.52		459,527		4,809		1.40		Fully Taxable	616,020		2,924		1.88		651,899		2,603		1.58
Exempt from Federal Taxes	Exempt from Federal Taxes	175,086		2,422		1.85		186,737		2,682		1.92		Exempt from Federal Taxes	129,673		689		2.11		169,153		785		1.84
Loans	Loans	2,785,721		82,263		3.95		2,637,265		79,354		4.02		Loans	3,096,240		36,699		4.70		2,872,066		29,618		4.09
Total Earning Assets	Total Earning Assets	3,888,992		93,747		3.22		3,657,060		87,196		3.19		Total Earning Assets	3,973,747		42,117		4.20		3,902,119		34,207		3.48
Allowance for Credit Losses	Allowance for Credit Losses	(27,579)						(27,235)						Allowance for Credit Losses	(31,386)						(28,006)
Cash and Due From Banks	Cash and Due From Banks	30,370						36,272						Cash and Due From Banks	32,874						32,475
Other Assets	Other Assets	146,750						156,592						Other Assets	134,760						141,150
Total Assets	Total Assets	$	4,038,533					$	3,822,689					Total Assets	$	4,109,995					$	4,047,738
Deposits:	Deposits:													Deposits:
Interest-Bearing Checking Accounts	Interest-Bearing Checking Accounts	$	1,024,087	629		0.08		$	902,772	566		0.08		Interest-Bearing Checking Accounts	$	795,627	1,156		0.58		$	996,116	267		0.11
Savings Deposits	Savings Deposits	1,549,610		3,778		0.33		1,471,467		1,490		0.14		Savings Deposits	1,505,916		9,729		2.56		1,549,451		2,469		0.63
Time Deposits of $250,000 or More	Time Deposits of $250,000 or More	52,251		143		0.37		92,111		228		0.33		Time Deposits of $250,000 or More	152,738		1,466		3.81		49,459		89		0.71
Other Time Deposits	Other Time Deposits	132,948		370		0.37		146,157		511		0.47		Other Time Deposits	257,710		2,051		3.16		136,834		150		0.43
Total Interest-Bearing Deposits	Total Interest-Bearing Deposits	2,758,896		4,920		0.24		2,612,507		2,795		0.14		Total Interest-Bearing Deposits	2,711,991		14,402		2.11		2,731,860		2,975		0.43
Short-Term Borrowings		(1)		—				6,375		3		0.06
FHLBNY Term Advances & Other Long-Term Debt		51,081		918		2.40		65,000		1,099		2.26
Borrowings														Borrowings	183,452		2,143		4.63		—		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts														Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		173		3.43		45,000		283		2.50
Finance Leases	Finance Leases	5,139		145		3.77		5,188		146		3.76		Finance Leases	5,075		46		3.60		5,125		48		3.72
Total Interest-Bearing Liabilities		2,815,115		5,983		0.28		2,689,070		4,043		0.20
Total Interest-bearing Liabilities														Total Interest-bearing Liabilities	2,920,518		16,764		2.28		2,781,985		3,306		0.47
Noninterest-bearing deposits	Noninterest-bearing deposits	824,674						750,163						Noninterest-bearing deposits	779,037						866,659
Other Liabilities	Other Liabilities	35,720						33,289						Other Liabilities	47,739						37,419
Total Liabilities	Total Liabilities	3,675,509						3,472,522						Total Liabilities	3,747,294						3,686,063
Stockholders’ Equity	Stockholders’ Equity	363,024						350,167						Stockholders’ Equity	362,701						361,675
Total Liabilities and Stockholders’ Equity	Total Liabilities and Stockholders’ Equity	$	4,038,533					$	3,822,689					Total Liabilities and Stockholders’ Equity	$	4,109,995					$	4,047,738

Net Interest Income	Net Interest Income			$	87,764					$	83,153			Net Interest Income			$	25,353					$	30,901
Net Interest Spread	Net Interest Spread					2.94	%					2.99	%	Net Interest Spread					1.92	%					3.01	%
Net Interest Margin	Net Interest Margin					3.02	%					3.04	%	Net Interest Margin					2.53	%					3.14	%

5256


Average Consolidated Balance Sheets and Net Interest Income Analysis

(GAAP Basis)
(Dollars In Thousands)


Nine Months Ended September 30:	2023						2022
			Interest		Rate				Interest		Rate
	Average		Income/		Earned/		Average		Income/		Earned/
	Balance		Expense		Paid		Balance		Expense		Paid
Interest-Bearing Deposits at Banks	$	101,104	$	3,958	5.23	%	$	289,681	$	1,826	0.84	%
Investment Securities:
Fully Taxable	635,126		8,823		1.86	%	638,504		7,236		1.52	%
Exempt from Federal Taxes	146,736		2,256		2.06	%	175,086		2,422		1.85	%
Loans	3,041,909		103,203		4.54	%	2,785,721		82,263		3.95	%
Total Earning Assets	3,924,875		118,240		4.03	%	3,888,992		93,747		3.22	%
Allowance for Credit Losses	(30,591)						(27,579)
Cash and Due From Banks	30,720						30,370
Other Assets	134,310						146,750
Total Assets	$	4,059,314					$	4,038,533
Deposits:
Interest-Bearing Checking Accounts	$	874,132	2,346		0.36		$	1,024,087	629		0.08
Savings Deposits	1,494,976		23,830		2.13		1,549,610		3,778		0.33
Time Deposits of $250,000 or More	127,230		3,159		3.32		52,251		143		0.37
Other Time Deposits	203,047		3,721		2.45		132,948		370		0.37
Total Interest-Bearing Deposits	2,699,385		33,056		1.64		2,758,896		4,920		0.24
Borrowings	151,887		5,309		4.67		(1)		—		—
Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		513		3.43		51,081		918		2.40
Finance Leases	5,088		143		3.76		5,139		145		3.77
Total Interest-Bearing Liabilities	2,876,360		39,021		1.81		2,815,115		5,983		0.28
Noninterest-bearing deposits	777,994						824,674
Other Liabilities	42,506						35,720
Total Liabilities	3,696,860						3,675,509
Stockholders’ Equity	362,454						363,024
Total Liabilities and Stockholders’ Equity	$	4,059,314					$	4,038,533


Net Interest Income			$	79,219					$	87,764
Net Interest Spread					2.22	%					2.94	%
Net Interest Margin					2.70	%					3.02	%

OVERVIEW

The following discussion and analysis focuses on and reviews the results of operations for the three-month period ended September 30, ~~2022~~2023 and the financial conditions as of September 30, ~~2022~~2023 and ~~2021.~~2022. The discussion below should be read in conjunction with the selected quarterly and annual information set forth above and the Unaudited Interim Consolidated Financial Statements and other financial data presented elsewhere in this Report. When necessary, prior-year financial information has been reclassified to conform to the current-year presentation.

~~COVID-19 Pandemic:~~

~~Arrow continues to monitor the pandemic and all the challenges it presents on the business, operations and the health and safety of our employees and customers.~~

Summary of Q3 ~~2022~~2023 Financial Results: Net income for the third quarter of ~~2022~~2023 was ~~$12.2~~$7.7 million, ~~compared to $13.0~~increasing from $6.0 million ~~for~~in the ~~third~~second quarter of ~~2021. The year-over-year decline in third-quarter net income was primarily due to the decrease of $2.4~~2023 and decreasing from $12.2 million ~~in income earned on loans made under the Paycheck Protection Program (PPP) and an increase in the provision expense for credit losses to $1.7 million as compared to $99 thousand~~ in the third quarter of ~~2021. Other factors impacting~~2022. The increase from the ~~net income for the third~~second quarter of 2022 include: the impact of non-interest expenses of $550 thousand relating to additional actuarial pension expense recognized in the quarter as a result of exceeding the threshold amount of lump sum distributions during the year; the addition of $536 thousand related2023 was primarily due to an ~~amortization adjustment~~increase in interest and dividend income of ~~indirect loans;~~$2.1 million, an increase of $1.1 million in non-interest income and a decrease in non-interest expense of ~~$193 thousand~~$0.6 million, partially offset by an increase of $2.5 million in interest expense. The decline from the the same period in the ~~net gain on sale~~prior year was primarily due to an increase of ~~loans when compared to the prior-year quarter.~~$13.5 million in interest expense partially offset by an increase in interest and dividend income of $7.9 million.

Diluted earnings per share ~~(EPS)~~(diluted EPS) for the first quarter of 2023 was ~~$0.74,~~$0.46, a decrease ~~of 5.1%~~ from ~~EPS of $0.78~~$0.72 reported for the third quarter of ~~2021.~~2022. Return on average equity (ROE) for the third quarter of ~~2022~~2023 decreased to ~~13.34%~~8.47%, as compared to a ROE of ~~14.34%~~13.34% for the quarter ended September 30, ~~2021.~~2022. Return on average assets (ROA) for the third quarter of ~~2022~~2023 was ~~1.19%~~0.75%, a decrease from an ROA of ~~1.32%~~1.19% for the quarter ended September 30, ~~2021.~~2022.

Total loans ~~were $2.9~~reached a record high of $3.1 billion as of September 30, ~~2022 reaching a record high for Arrow.~~2023. Loan growth for the third quarter of ~~2022~~2023 was ~~$80.0~~$68.7 million, and ~~increased $270.0~~$155.4 million ~~or 10.2%,~~ from ~~September 30, 2021. In~~December 31, 2022. Loan growth was spread across all segments.

Arrow entered into two pay-fixed PLM fair value swaps, with total notional amounts of $250 million and $50 million, respectively. The transaction is accretive to interest income, adding more than $2 million annually. Rising interest rates will increase the ~~third quarter, total outstanding commercial loans increased $16.3 million, or 2.0%. The consumer loan portfolio grew by $24.5 million, or 2.4%, in~~net interest income benefit, while falling rates will reduce the ~~third quarter, primarily within the indirect automobile lending program. Total outstanding residential real estate loans increased $39.2 million, or 3.9%, for the third quarter of 2022.~~benefit.

At September 30, ~~2022,~~2023, deposit balances were ~~$3.8 billion. Deposits in the third quarter~~$3.7 billion, an increase of ~~2022 increased by $249.4~~$164.3 million from June 30, 2023 and $168.1 million from December 31, 2022. Overall in 2023, the ~~prior quarter~~deposit mix has continued to shift from non-interest bearing accounts to higher cost money market and ~~increased by $189.5 million, or 5.3%, from the prior-year level. Municipal~~time deposit accounts. Seasonal municipal deposits ~~increased $127.3~~help drive an increase in demand deposits of $38.9 million in the third quarter and $13.8 million, or 1.4%, from September 30, 2021. Non-municipal deposits increased $122.1 million for the quarter and $175.7 million, or 6.7%, from September 30, 2021. Noninterest-bearing deposits represented 24.0% of total deposits at September 30, 2022, compared to 23.4% of total deposits at September 30, 2021. At September 30, 2022, total time deposits were $186.7 million.quarter.

Net interest income for the third quarter was ~~$30.9~~$25.4 million, ~~up 7.9%~~decreasing 1.6% from ~~$28.6~~$25.8 million in the second quarter of 2023 and 18.0% from $30.9 million in the comparable quarter of ~~2021. Interest~~2022. Total interest and ~~fees on loans were $29.6~~dividend income was $42.1 million for the third quarter of ~~2022,~~2023, an increase from $40.0 million in the second quarter of ~~9.1%~~2023 and from ~~$27.2~~$34.2 million for the quarter ~~ending~~ended September 30, ~~2021. The increase was primarily due to~~2022. These increases are driven by loan growth and higher ~~market~~loan rates. Interest and fees related to PPP loans, included in the $29.6 million total, were $70 thousand in the third quarter of 2022, a decrease of $2.4 million from the third quarter of 2021 primarily resulting from the wind-down of the PPP loan program. Interest expense for the third quarter of ~~2022~~2023 was ~~$3.3~~$16.8 million, an increase from $14.2 million for the second quarter of ~~$2.1~~2023 and from $3.3 million ~~or 182.8%, from $1.2 million in expense~~ for the comparable quarter ~~ending~~ended September 30, ~~2021.~~2022. The ~~increase~~increases for both comparison periods were driven by higher deposit rates and changes in deposit composition.

Net interest margin was 2.53% for the quarter, compared to 2.61% for the second quarter of 2023 and 3.14% for the third quarter of 2022. The decrease in net interest margin compared to the second quarter in 2023 as well as the third quarter of 2022 was primarily the result of ~~year-over-year deposit growth and higher deposit rates.~~

~~Net interest margin was 3.14% for~~ the quarter, compared to 3.04% for the third quarter of 2021. The increase in net interest margin was due to a variety of factors including higher market rates impacting asset yields, a reduction in cash balances and a one-time adjustment related to indirect loan fees. Net interest margin, excluding PPP income, increased to 3.14% from 2.84% in the comparable prior-year quarter. The cost of interest-bearing liabilities ~~increased primarily due~~increasing at a faster pace than the yield on average earning assets. In addition, deposits have continued to ~~the repricing of municipal deposits~~migrate to higher costs products such as money market savings and ~~retail CD specials.~~time deposits.

~~Noninterest~~Non-interest income for the three months ended September 30, ~~2022,~~2023, was ~~$7.8~~$8.1 million, compared to ~~$7.7~~$6.9 million in the second quarter of 2023 and $7.8 million in the comparable ~~2021 quarter.~~quarter of 2022. Income from fiduciary activities, ~~for the three months ended September 30, 2022, decreased by $230 thousand over~~which includes Wealth Management services, was fairly consistent to the comparable ~~quarter of 2021, primarily driven by~~prior-year quarter. Year to date income from fiduciary activities trail the prior year due to continued declining market ~~conditions.~~performance. Fees and other services to customers ~~increased $105 thousand over~~was consistent with the ~~comparable~~linked quarter of ~~2021. Gain on sales of loans decreased $193 thousand from the third quarter of 2021.~~2023, but declined year-over-year due to lower interchange fees. Other ~~operating~~ income increased ~~$176 thousand~~ from both the ~~comparable~~second quarter and the previous year as a result of ~~2021 due to a variety of factors, including bank-owned~~bank owned life insurance proceeds.

~~Noninterest~~Non-interest expense for the third quarter of ~~2022~~2023 was ~~$21.4~~$23.5 million, a decrease from $24.1 million in the second quarter of 2023 and an increase from ~~$19.4 million for the third quarter of 2021. The largest component of noninterest expense was salaries and benefits paid to employees, which totaled $12.4~~$21.4 million for the third quarter of 2022. InThe increase from the prior year was in large part related to $1.1 million of additional legal and professional fees incurred in the third quarter of 2023 associated with the delay in the filing of the 2022 ~~$550 thousand relating~~Form 10-K and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the "First Quarter Form 10-Q"), as well as an increase in technology costs and costs related to ~~additional actuarial pension expense was recognized as a result of exceeding~~FDIC insurance. Total year to date expenses related to the ~~threshold amount of lump sum distributions during the year. The expense for estimated credit losses on off-balance sheet credit exposures included in other expenses was $30 thousand.~~delayed filings were $4.1 million.

For the third quarter of ~~2022,~~2023, the provision for credit losses was ~~$1.7 million,~~$354 thousand compared to ~~$99~~$948 thousand in ~~provision expense~~the second quarter of 2023 and $1.7 million in the prior-year quarter. The key drivers for the ~~increase~~provision for credit losses in the third quarter of 2023 were ~~strong~~ loan growth, charge-offs and to a ~~deterioration~~lesser extent changes to the economic forecast factors embedded in ~~forecasted~~the allowance model. The provision was partially offset by the qualitative factors related to the residential loan portfolio, which continue to indicate local market conditions performing well above the Case-Shiller U.S. National Home Price Index, which is utilized in the economic ~~conditions.~~ forecast.

The changes in net income, net interest income and net interest margin between the three-month ~~and nine-month~~ periods are discussed in detail under the heading "RESULTS OF OPERATIONS," beginning on page ~~68.~~74.

Regulatory Capital and Change in Stockholders' Equity: At September 30, ~~2022,~~2023, Arrow continued to exceed all required minimum capital ratios under the current bank regulatory capital rules (the "Capital Rules") as implemented under the Dodd-Frank Wall Street Reform and Consumer Protection Act ~~(the "Capital Rules"~~("Dodd-Frank") at both the holding company and bank levels. At that date, both subsidiary banks, as well as the holding company, continued to qualify as "well-capitalized" under the capital classification guidelines as defined by the

Capital Rules. Because of continued profitability and strong asset quality, the regulatory capital levels throughout recent years have consistently remained well in excess of the various required regulatory minimums in effect from time to time, as they do at present.

In 2020, federal bank regulators introduced an optional simplified measure of capital adequacy for qualifying community banking organizations (CBLR). A qualifying community banking organization that opts into the CBLR framework and meets all the requirements

under the CBLR framework will be considered to have met the well-capitalized ratio requirements under the “prompt corrective action” regulations and will not be required to report or calculate risk-based capital ratios.

The CBLR final rule became effective as of January 1, 2020, and Arrow and both subsidiary banks have opted out of utilizing the CBLR framework. Therefore, the Capital Rules remain applicable to Arrow and both subsidiary banks.

Stockholders’ equity was ~~$345.6~~$360.0 million at September 30, ~~2022,~~2023, a decrease of ~~$25.6~~$1.4 million or ~~6.9%~~0.4%, from the June 30, 2023 level of $361.4 million, and an increase of $6.5 million, or 1.8%, from the December 31, ~~2021~~2022 level of ~~$371.2~~$353.5 million ~~and a decrease of $14.6 million, or 4.1%, from the prior-year level.~~ The ~~decrease~~increase in stockholders' equity over the first nine months of ~~2022~~2023 principally reflected the following factors: the addition of (i) ~~$36.7~~$22.4 million of net income for the period plus (ii) the issuance of ~~$2.8~~$1.3 million of common stock through employee benefit and dividend reinvestment plans reduced by (iii) other comprehensive loss of ~~$49.4~~$2.9 million, (iv) cash dividends of ~~$13.0~~$13.4 million and (v) repurchases of common stock of ~~$2.7 million. The majority of other comprehensive loss, $52.8 million, relates to net unrealized losses on AFS debt securities as a result of rising interest rates which occurred during 2022.~~$848 thousand. The components of the change in stockholders’ equity since year-end ~~2021~~2022 are presented in the Consolidated Statement of Changes in Stockholders’ Equity on page 6, and are discussed in more detail in the next section.

At September 30, ~~2022,~~2023, book value per share was ~~$20.91, down by 4.2%~~$21.12, up 4.0% over the prior-year level. Tangible book value per share (a non-GAAP measure that deducts intangible assets from stockholders' equity) was ~~$19.49, a decrease~~$19.76, an increase of ~~$0.89,~~$0.84, or 4.4%, over the level as of September 30, ~~2021.~~2022. See the disclosure on page 4651 related to the use of non-GAAP financial measures including tangible book value.

On September 30, ~~2022,~~2023, Arrow's closing stock price was ~~$28.82,~~$17.02, representing a trading multiple of ~~1.48~~0.86 to tangible book value. In the third quarter of ~~2022,~~2023, Arrow paid a quarterly cash dividend of ~~$0.27 which is $0.26, as adjusted for the 3% stock dividend distributed on September 23, 2022~~$0.26. Further discussion of dividends is included in the Capital Components; Stock Repurchases; Dividends section located on page ~~66.~~72.

Loan Quality: Net charge-offs for the third quarter of ~~2022~~2023 were ~~$573~~$412 thousand as compared to ~~$153~~$573 thousand for the comparable ~~2021~~2022 quarter. The ratio of net charge-offs to average loans (annualized) was ~~0.08%~~0.05% for the three month period ended September 30, ~~2022, an increase~~2023, a decrease from ~~0.02% for~~0.08% with the three month period ended September 30, ~~2021.~~2022. The increase in delinquent loans is primarily attributable to one commercial loan relationship. See Footnote 5, Loans, for additional discussion.

For the third quarter of ~~2022,~~2023, the provision for credit losses was ~~$1.7 million~~$354 thousand and ~~the expense~~a credit for estimated credit losses on off-balance sheet credit exposures was ~~$30~~$192 thousand. The allowance for credit losses was ~~$29.2~~$31.1 million on September 30, ~~2022,~~2023, which represented ~~1.00%~~0.99% of loans outstanding, as compared to ~~1.02%~~1.00% on September 30, ~~2021.~~2022.

Nonperforming loans were ~~$9.4~~$6.3 million at September 30, ~~2022,~~2023, representing ~~0.32%~~0.20% of period-end loans, a decrease from the September 30, ~~2021~~2022 ratio of ~~0.43%~~0.32% and a decrease from the ~~December 31, 2021~~June 30, 2023 ratio of ~~0.44%~~0.21%. The ratio continues to reasonably compare ~~favorably~~ with the weighted average ratio of the peer group of ~~0.42%~~0.39% at June 30, ~~2022.~~2023. Nonperforming assets of ~~$10.0~~$6.9 million at September 30, ~~2022~~2023 represented ~~0.24%~~0.16% of period-end assets down from ~~0.29%~~0.24% at ~~December 31, 2021 and~~ September 30, ~~2021.~~2022.

Loan Segments: As of September 30, ~~2022,~~2023, total loans grew by ~~$256.9~~$155.4 million, or ~~9.6%~~5.2%, as compared to the balance at December 31, ~~2021.~~2022. The largest increase was in ~~consumer loans~~the residential real estate loan portfolio which increased ~~$135.0~~$77.6 million, or ~~14.7%~~7.2%. Consumer loans increased $42.5 million, or 4.0%, primarily comprised of automobile loans. Commercial and commercial real estate loans increased by ~~$16.7~~$35.4 million, or ~~2.1%~~4.2%, from December 31, 2021. PPP loans, included in the commercial portfolio, decreased $43.6 million from December 31, 2021. The residential real estate loan portfolio increased $105.1 million, or 11.1%, from December 31, 2021.2022.

•Commercial and Commercial Real Estate Loans: Combined, these loans comprise ~~28.0%~~28.1% of the total loan portfolio at period-end. Commercial property values in Arrow's region have largely remained stable, however, there remains uncertainty surrounding market conditions due to ~~the~~ inflation and the rising interest rate environment. Appraisals on nonperforming and watched CRE loan properties are updated as deemed necessary, usually when the loan is downgraded or when there has been significant market deterioration since the last appraisal.

•Consumer Loans: These loans (primarily automobile loans) comprised ~~36.1%~~35.3% of the total loan portfolio at period-end. Consumer automobile loans at September 30, ~~2022,~~2023, were ~~99.5%~~99.6% of this portfolio segment. The vast majority of automobile loans are initiated through the purchase of vehicles by consumers with automobile dealers. As of September 30, ~~2022,~~2023, demand has ~~remained stable. Although supply constraints have lessened, inflation~~slowed as a result of current economic conditions. Inflation and higher rates may continue to limit the potential growth in this category.

•Residential Real Estate Loans: These loans, including home equity loans, made up ~~35.9%~~36.6% of the total loan portfolio at period-end. ~~The~~Demand for residential real estate ~~market in Arrow's service area~~ has ~~been stable in recent periods.~~continued but weakened as interest rates have increased. A continuous elevated rate environment may impact future demand. Arrow originated nearly all of the residential real estate loans currently held in the loan portfolio and applies conservative underwriting standards to loan originations. Arrow ~~typically sells~~has historically sold a portion of residential real estate mortgage originations into the secondary market. The ratio of the sales of originations to total originations tends to fluctuate from period to period based on market conditions and other factors. ~~Since the second half 2021, sales have decreased as a result of the strategic decision to grow the residential loan portfolio.~~ The rate at which mortgage loan originations are sold in future periods will depend on various circumstances, including prevailing mortgage rates, other lending opportunities, capital and liquidity needs, and the availability of a market for such transactions.

Liquidity and Access to Credit Markets: Arrow has not experienced any liquidity events or special concerns in recent years or thus far in ~~2022.~~2023. Arrow’s liquidity position provides the necessary flexibility to address any unexpected near-term ~~disruptions.~~liquidity needs. Interest-bearing cash balances at September 30, ~~2022~~2023 were ~~$328.6~~$255.0 million compared to ~~$548.9~~$328.6 million at September 30, ~~2021 driven by loan growth outpacing deposit growth as well as redeploying cash into the investment portfolio.~~2022. Contingent lines of credit are also available.

Operating collateralized lines of credit are established and available through the FHLBNY, FRB and ~~FRB,~~other bank lines totaling approximately $1.5 billion. The general terms of Arrow's lines of credit have not changed significantly in recent periods (see the general liquidity discussion on page ~~66)~~72). Historically, Arrow has principally relied on asset-based liquidity (i.e., funds in overnight investments and cash flow from maturing investments and loans) with liability-based liquidity as a secondary source of funds (the main liability-based sources are an overnight borrowing arrangement with correspondent banks, an arrangement for overnight borrowing and term credit advances from the FHLBNY, and an additional arrangement for short-term advances at the Federal Reserve Bank discount window). Regular liquidity stress tests and tests of the contingent liquidity plan are performed to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity crises.

~~Reference Rate Reform:~~ On March 5, 2021, the ICE Benchmark Administration (the IBA), the administrator of LIBOR, and the United Kingdom’s Financial Conduct Authority, the regulatory supervisor for the IBA, announced certain future dates that LIBOR settings will cease to be provided by any administrator. In addition, regulators have issued statements indicating that financial institutions should not issue new LIBOR-based financial instruments after January 1, 2022. To prepare for the upcoming cessation of LIBOR, Arrow established a committee in 2020 comprised of bank management to prepare for the discontinuance of LIBOR, which is widely used to reprice floating rate financial instruments. Based on a review of existing floating rate financial instruments, management has determined that the financial products tied to LIBOR will not be subject to cessation until June 30, 2023. This review also identified that only a few legacy contracts do not include appropriate fallback language. On March 15, 2022, the “Adjustable Interest Rate (LIBOR) Act” was enacted by Congress. The law provides basic framework for addressing the discontinuation of U.S. Dollar LIBOR under federal law. The law establishes a clear uniform process, on a nationwide basis, for replacing LIBOR in existing contracts that do not provide for the use of a clearly defined or practicable replacement benchmark rate (so-called “tough legacy” contracts), without affecting the ability of parties to use any appropriate benchmark rate in new contracts. Arrow no longer issues new LIBOR-based financial instruments. Furthermore, U.S. Dollar LIBOR indices utilized by Arrow's existing financial instruments shall cease on or before June 30, 2023. On January 1, 2022, Arrow began using the CME Term Secured Overnight Financing Rate (SOFR) as the primary index for financial instruments and the Bloomberg Short Term Bank Yield Index (BSBY) as a secondary index.

Visa Class B Common Stock: Arrow's subsidiary bank, ~~Glens Falls National,~~GFNB, like other Visa member banks, bears some indirect contingent liability for Visa's direct liability arising out of certain antitrust claims involving merchant discounts to the extent that Visa's liability might exceed the amount funded in its litigation escrow account. On December 13, 2019, the Court granted final approval to a settlement in this class action lawsuit. On January 3, 2020 an appeal of the final-approved order was filed with the court. On December 16, 2021, the second circuit court of appeals set oral arguments regarding objections to final approval of the settlement for March 16, 2022. On March 16, 2022, the Second Circuit Court of Appeals heard oral arguments regarding objections to final approval of the ~~Settlement.~~settlement. On April 25, 2023, the Court of Appeals for the Second Circuit denied certain objectors’ request for panel rehearing or, in the alternative, rehearing en banc. It is ~~currently~~ unknown ~~when~~if any party will pursue further appeals to the ~~appeals will be decided.~~U.S Supreme Court. When the appeals process is resolved and assuming the balance in the litigation escrow account is sufficient to cover the litigation claims and related expenses, Arrow could potentially realize a gain on the receipt of Visa Class A common stock. At September 30, ~~2022, Glens Falls National~~2023, GFNB held 27,771 shares of Visa Class B common stock, and utilizing the conversion ratio to Class A common stock at that time, these Class B shares would convert to approximately ~~45,000~~44,000 shares of Visa Class A common stock. Since the litigation settlement is not certain, Arrow has not recognized any economic value for these shares.

5560

CHANGE IN FINANCIAL CONDITION

Summary of Selected Consolidated Balance Sheet Data

(Dollars in Thousands)


		At Period-End															At Period-End
		9/30/2022		12/31/2021		9/30/2021		$ Change From December		$ Change From September		% Change From December (not annualized)		% Change From September			9/30/2023		12/31/2022		9/30/2022		$ Change From December		$ Change From September		% Change From December (not annualized)		% Change From September
Interest-Bearing Bank Balances	Interest-Bearing Bank Balances	$	328,557	$	430,718	$	548,936	$	(102,161)	$	(220,379)	(23.7)	%	(40.1)	%	Interest-Bearing Bank Balances	$	254,961	$	32,774	$	328,557	$	222,187	$	(73,596)	677.9	%	(22.4)	%
Securities Available-for-Sale	Securities Available-for-Sale	575,054		559,316		486,900		15,738		88,154		2.8	%	18.1	%	Securities Available-for-Sale	519,240		573,495		575,054		(54,255)		(55,814)		(9.5)	%	(9.7)	%
Securities Held-to-Maturity	Securities Held-to-Maturity	182,178		196,566		198,337		(14,388)		(16,159)		(7.3)	%	(8.1)	%	Securities Held-to-Maturity	140,577		175,364		182,178		(34,787)		(41,601)		(19.8)	%	(22.8)	%
Equity Securities	Equity Securities	2,126		1,747		1,886		379		240		21.7	%	12.7	%	Equity Securities	1,960		2,174		2,126		(214)		(166)		(9.8)	%	(7.8)	%
Loans (1)	Loans (1)	2,924,794		2,667,941		2,654,751		256,853		270,043		9.6	%	10.2	%	Loans (1)	3,138,617		2,983,207		2,924,794		155,410		213,823		5.2	%	7.3	%
Allowance for Credit Losses	Allowance for Credit Losses	29,232		27,281		26,956		1,951		2,276		7.2	%	8.4	%	Allowance for Credit Losses	31,112		29,952		29,232		1,160		1,880		3.9	%	6.4	%
Earning Assets (1)	Earning Assets (1)	4,017,429		3,861,668		3,896,190		155,761		121,239		4.0	%	3.1	%	Earning Assets (1)	4,060,465		3,773,078		4,017,429		287,387		43,036		7.6	%	1.1	%
Total Assets	Total Assets	$	4,232,778	$	4,027,952	$	4,071,104	$	204,826	$	161,674	5.1	%	4.0	%	Total Assets	$	4,272,911	$	3,969,509	$	4,232,778	$	303,402	$	40,133	7.6	%	0.9	%
Noninterest-Bearing Deposits	Noninterest-Bearing Deposits	$	910,221	$	810,274	$	841,910	$	99,947	$	68,311	12.3	%	8.1	%	Noninterest-Bearing Deposits	$	798,392	$	836,871	$	910,221	$	(38,479)	$	(111,829)	(4.6)	%	(12.3)	%
Interest-Bearing Checking Accounts	Interest-Bearing Checking Accounts	1,113,850		994,391		1,035,358		119,459		78,492		12.0	%	7.6	%	Interest-Bearing Checking Accounts	920,250		997,694		1,113,850		(77,444)		(193,600)		(7.8)	%	(17.4)	%
Savings Deposits	Savings Deposits	1,584,373		1,531,287		1,515,692		53,086		68,681		3.5	%	4.5	%	Savings Deposits	1,496,193		1,454,364		1,584,373		41,829		(88,180)		2.9	%	(5.6)	%
Time Deposits over $250,000	Time Deposits over $250,000	59,059		82,811		73,889		(23,752)		(14,830)		(28.7)	%	(20.1)	%	Time Deposits over $250,000	167,614		76,224		59,059		91,390		108,555		119.9	%	183.8	%
Other Time Deposits	Other Time Deposits	127,602		131,734		138,714		(4,132)		(11,112)		(3.1)	%	(8.0)	%	Other Time Deposits	284,036		133,211		127,602		150,825		156,434		113.2	%	122.6	%
Total Deposits	Total Deposits	$	3,795,105	$	3,550,497	$	3,605,563	$	244,608	$	189,542	6.9	%	5.3	%	Total Deposits	$	3,666,485	$	3,498,364	$	3,795,105	$	168,121	$	(128,620)	4.8	%	(3.4)	%
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase		$	—	$	—	$	2,426	$	—	$	(2,426)	—	%	(100.0)	%
Borrowings																Borrowings	$	174,300	$	54,800	$	25,000	$	119,500	$	149,300	218.1	%	597.2	%

FHLBNY Advances - Term		25,000		45,000		45,000		(20,000)		(20,000)		(44.4)	%	(44.4)	%

Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		20,000		—		—		—	%	—	%	Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts	20,000		20,000		20,000		—		—		—	%	—	%
Stockholders' Equity	Stockholders' Equity	345,550		371,186		360,171		(25,636)		(14,621)		(6.9)	%	(4.1)	%	Stockholders' Equity	360,014		353,538		345,550		6,476		14,464		1.8	%	4.2	%

(1) Includes Nonaccrual Loans.

Changes in Earning Assets: The loan portfolio at September 30, ~~2022,~~2023, was ~~$2.9~~$3.1 billion, an increase of ~~$256.9~~$155.4 million, or ~~9.6%~~5.2%, from the December 31, ~~2021~~2022 level and up by ~~$270.0~~$213.8 million, or ~~10.2%~~7.3%, from the September 30, ~~2021~~2022 level. The following trends were experienced in our largest segments:

•Commercial and commercial real estate loans: This segment of the loan portfolio increased by ~~$16.7~~$35.4 million, or ~~2.1%~~4.2%, during the first nine months of ~~2022.~~2023. In the first nine months of ~~2022, $43.6 million~~2023, loan growth has slowed as a result of ~~PPP loans were forgiven.~~the current rate environment.

•Consumer loans (primarily automobile loans through indirect lending): As of September 30, ~~2022,~~2023, these loans, primarily auto loans originated through dealerships in New York and Vermont, increased by ~~$135.0~~$42.5 million, or ~~14.7%~~4.0%, from the December 31, ~~2021~~2022 balance. Inflation and rising rates may continue to slow ~~the current high~~ demand.

•Residential real estate loans: This segment increased during the first nine months of ~~2022~~2023 by ~~$105.1~~$77.6 million, or ~~11.1%~~7.2%. ~~In the first nine months~~A deterioration of ~~2022, Arrow sold $4.1 million, or 2.3%, of originations. Arrow~~economic conditions may continue to ~~sell a portion of mortgage loan originations in upcoming periods if market conditions and strategic balance sheet and interest-rate risk management decisions warrant. Rising rates may~~ reduce loan production infor the ~~near future.~~remainder of the year.

Changes in Sources of Funds: Deposit balances reached ~~$3.8~~$3.7 billion, ~~up $189.5~~down $128.6 million, or ~~5.3%~~3.4%, from the prior-year level and increased ~~$244.6~~$168.1 million from December 31, ~~2021. Deposits increased in the third quarter of 2022 by $249.4 million.~~2022. Noninterest-bearing deposits represented ~~24.0%~~21.8% of total deposits at September 30, ~~2022,~~2023, compared to ~~23.4%~~24.0% of total deposits on September 30, ~~2021.~~2022. At September 30, ~~2022,~~2023, total time deposits were ~~$186.7~~$451.6 million. Municipal deposits increased ~~$13.8~~$110.0 million, or ~~1.4%~~12.6% from September 30, ~~2021. Federal home loan term advances~~2022. Total borrowings were ~~$25.0~~$174.3 million, ~~a decrease~~an increase from ~~$45.0~~$25.0 million at September 30, ~~2021.~~2022. In the second quarter of 2023, Arrow borrowed $150 million as part of the BTFP primarily replacing FHLB advances. The BTFP was created to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors.

5661

Municipal Deposits: Fluctuations in balances of interest-bearing checking accounts are often the result of timing and behavior of municipal deposits. Municipal deposits have historically averaged between 20% to ~~25%~~30% of total deposits. Municipal deposits are typically placed in interest-bearing checking, savings and various time deposit accounts.

In general, there is a seasonal pattern to municipal deposits which dip to a low point in August each year. Account balances tend to increase throughout the fall and into early winter from tax deposits, flatten out after the beginning of the ensuing calendar year, and increase again at the end of March from the electronic deposit of NYS aid payments to school districts. In addition to seasonal behavior, the overall level of municipal deposit balances fluctuates from year-to-year as a result of local economic factors as well as competition from other banks and non-bank entities. Municipal deposits have been impacted by increased stimulus payments in response to the COVID-19 pandemic including the American Rescue Plan Act of 2021. Stimulus related funding is expected to decline over time.

Arrow uses reciprocal deposits for a select group of municipalities to reduce the amount of investment securities required to be pledged as collateral for municipal deposits where municipal deposits in excess of the FDIC insurance coverage limits were transferred to other participating banks, divided into portions so as to qualify such transferred deposits for FDIC insurance coverage at each transferee bank. In return, reciprocal amounts are transferred to Arrow in equal amounts of deposits from the participant banks. The balances of reciprocal deposits were ~~$557.6~~$618.9 million and ~~$533.5~~$557.6 million at September 30, ~~2022~~2023 and September 30, ~~2021,~~2022, respectively.

Uninsured Deposits: Arrow's deposit base includes both insured and uninsured deposits. Arrow continually monitors levels and composition of uninsured deposits. Uninsured deposit balances at September 30, 2023 were less than 30% of the total deposit base.

FINANCIAL CONDITION

Investment Portfolio Trends

The table below presents the changes in the period-end balances for available-for-sale, held-to-maturity and equity securities from December 31, ~~2021~~2022 to September 30, ~~2022~~2023 (in thousands):


		(Dollars in Thousands)													(Dollars in Thousands)
		Fair Value at Period-End						Net Unrealized Gains (Losses) For Period Ended							Fair Value at Period-End						Net Unrealized Gains (Losses) For Period Ended
		9/30/2022		12/31/2021		Change		9/30/2022		12/31/2021		Change
.														.	9/30/2023		12/31/2022		Change		9/30/2023		12/31/2022		Change
Securities Available-for-Sale:	Securities Available-for-Sale:													Securities Available-for-Sale:

U.S. Agency Securities	U.S. Agency Securities	$	163,965	$	108,365	$	55,600	$	(16,035)	$	(1,635)	$	(14,400)	U.S. Agency Securities	$	176,421	$	175,199	$	1,222	$	(13,579)	$	(14,801)	$	1,222
State and Municipal Obligations	State and Municipal Obligations	340		400		(60)		—		—		—		State and Municipal Obligations	280		340		(60)		—		—		—
Mortgage-Backed Securities	Mortgage-Backed Securities	409,949		449,751		(39,802)		(55,536)		1,009		(56,545)		Mortgage-Backed Securities	341,739		397,156		(55,417)		(56,584)		(50,599)		(5,985)
Corporate and Other Debt Securities	Corporate and Other Debt Securities	800		800		—		(200)		(200)		—		Corporate and Other Debt Securities	800		800		—		(200)		(200)		—

Total	Total	$	575,054	$	559,316	$	15,738	$	(71,771)	$	(826)	$	(70,945)	Total	$	519,240	$	573,495	$	(54,255)	$	(70,363)	$	(65,600)	$	(4,763)

Securities Held-to-Maturity:	Securities Held-to-Maturity:													Securities Held-to-Maturity:
State and Municipal Obligations	State and Municipal Obligations	$	163,849	$	184,374	$	(20,525)	$	(5,770)	$	4,179	$	(9,949)	State and Municipal Obligations	$	125,813	$	160,470	$	(34,657)	$	(5,204)	$	(3,130)	$	(2,074)
Mortgage-Backed Securities	Mortgage-Backed Securities	11,951		16,918		(4,967)		(608)		547		(1,155)		Mortgage-Backed Securities	8,998		11,153		(2,155)		(562)		(611)		49

Total	Total	$	175,800	$	201,292	$	(25,492)	$	(6,378)	$	4,726	$	(11,104)	Total	$	134,811	$	171,623	$	(36,812)	$	(5,766)	$	(3,741)	$	(2,025)

Equity Securities	Equity Securities	$	2,126	$	1,747	$	379	$	—	$	—	$	—	Equity Securities	$	1,960	$	2,174	$	(214)	$	—	$	—	$	—

The table below presents the weighted average yield for available-for-sale and held-to-maturity securities as of September 30, ~~2022~~2023 (in thousands).


		September 30, 2022																						September 30, 2023
		Within One Year				After One But Within Five Years				After Five But Within Ten Years				After Ten Years				Total						Within One Year				After One But Within Five Years				After Five But Within Ten Years				After Ten Years				Total
		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount			Yield			Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount			Yield
Securities Available-for-Sale:	Securities Available-for-Sale:																						Securities Available-for-Sale:

U.S. Agency Securities	U.S. Agency Securities	$	5,000	2.0	%	$	175,000	1.4	%	$	—	—	%	$	—	—	%	$	180,000	180000000	1.4	%	U.S. Agency Securities	$	15,000	3.5	%	$	175,000	1.7	%	$	—	—	%	$	—	—	%	$	190,000	190000000	1.8	%
State and Municipal Obligations	State and Municipal Obligations	20		—	%	—		—	%	320		—	%			—	%	340			—	%	State and Municipal Obligations	—		—	%	—		—	%	280		6.8	%			—	%	280			6.8	%
Mortgage-Backed Securities	Mortgage-Backed Securities	817		1.8	%	254,104		1.9	%	210,564		1.6	%	—		—	%	465,485			1.8	%	Mortgage-Backed Securities	586		1.7	%	215,671		1.9	%	182,066		1.7	%	—		—	%	398,323			1.8	%
Corporate and Other Debt Securities	Corporate and Other Debt Securities			—	%			—	%	1,000		5.0	%	—		—	%	1,000			5.0	%	Corporate and Other Debt Securities			—	%			—	%	1,000		8.3	%	—		—	%	1,000			8.3	%

Total	Total	$	5,837	1.9	%	$	429,104	1.7	%	$	211,884	1.6	%	$	—	—	%	$	646,825		1.7	%	Total	$	15,586	3.4	%	$	390,671	1.8	%	$	183,346	1.7	%	$	—	—	%	$	589,603		1.8	%

Securities Held-to-Maturity:	Securities Held-to-Maturity:																						Securities Held-to-Maturity:
State and Municipal Obligations	State and Municipal Obligations	$	50,423	1.3	%	$	115,113	2.3	%	$	4,044	2.7	%	$	39	—	%	$	169,619		2.0	%	State and Municipal Obligations	$	56,686	2.9	%	$	71,994	2.5	%	$	2,308	3.7	%	$	29	6.7	%	$	131,017		2.7	%
Mortgage-Backed Securities	Mortgage-Backed Securities	—		—	%	12,559		2.5	%	—		—	%	—		—	%	12,559			2.5	%	Mortgage-Backed Securities	—		—	%	9,560		2.5	%	—		—	%	—		—	%	9,560			2.5	%
Corporate and Other Debt Securities	Corporate and Other Debt Securities	—		—	%	—		—	%	—		—	%	—		—	%	—			—	%	Corporate and Other Debt Securities	—		—	%	—		—	%	—		—	%	—		—	%	—			—	%
Total	Total	$	50,423	1.3	%	$	127,672	2.3	%	$	4,044	2.7	%	$	39	—	%	$	182,178		2.0	%	Total	$	56,686	2.9	%	$	81,554	2.5	%	$	2,308	3.7	%	$	29	6.7	%	$	140,577		2.7	%

At September 30, ~~2022,~~2023, Arrow held no investment securities in the securities portfolios that consisted of or included, directly or indirectly, obligations of foreign governments or governmental agencies of foreign issuers.

In the periods referenced above, mortgage-backed securities consisted solely of mortgage pass-through securities and collateralized mortgage obligations (CMOs) issued or guaranteed by U.S. federal agencies or by government-sponsored enterprises (GSEs). Mortgage pass-through securities provide to the investor monthly portions of principal and interest pursuant to the contractual obligations of the underlying mortgages. CMOs are pools of mortgage-backed securities, the repayments on which have generally been separated into two or more components (tranches), where each tranche has a separate estimated life and yield. Arrow's practice has been to purchase pass-through securities and CMOs that are issued or guaranteed by U.S. federal agencies or GSEs, and the tranches of CMOs purchased are generally those having shorter average lives and/or durations. Lower market interest rates and/or payment deferrals on underlying loans that make up mortgage-backed security collateral may impact cashflows.

In the periods referenced above, U.S. Government & Agency Obligations consisted solely of agency bonds issued by GSEs. These securities generally pay fixed semi-annual coupons with principle payments at maturity. For some, callable options are included that may impact the timing of these principal payments. Arrow's practice has been to purchase ~~Agency~~agency securities that are issued or guaranteed by GSEs with limited embedded optionality (call features). Final maturities are generally less than 5 years.

Arrow evaluates available-for-sale debt securities in unrealized loss positions at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or non-credit related factors. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized within the allowance for credit losses on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense. Arrow determined that at September 30, ~~2022,~~2023, gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. ~~In 2022, the~~The recent rising interest rate environment resulted in an increase in unrealized losses versus the comparable prior period. Arrow does not intend to sell, nor is it more likely than not that Arrow will be required to sell any securities before recovery of its amortized cost basis, which may be at maturity. Therefore, Arrow carried no allowance for credit loss at September 30, ~~2022~~2023 and there was no credit loss expense recognized by Arrow with respect to the securities portfolio during the nine months ended September 30, ~~2022.~~2023.

Arrow's held-to-maturity debt securities are comprised of GSEs and state and municipal obligations. GSE securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss. Arrow performs an analysis of the credit worthiness of municipal obligations to determine if a security is of investment grade. The analysis may include, but may not solely rely upon credit analysis conducted by external credit rating agencies. Arrow determined that the expected credit loss on its held to maturity debt portfolio was immaterial and, therefore, no allowance for credit loss was recorded as of September 30, ~~2022.~~2023.

Changes in net unrealized gains or losses during recent periods have been primarily attributable to changes in market rates during the periods in question and not due to the credit-worthiness of the issuers.

Investment Sales, Purchases and Maturities

There were no sales of investment securities within the nine month periods ended September 30, ~~2022~~2023 or ~~2021.~~2022.

The following table summarizes purchases of investment securities within the available-for-sale and held-to-maturity portfolios for the nine month periods ended September 30, ~~2022~~2023 and ~~2021,~~2022, as well as proceeds from the maturity and calls of investment securities within each portfolio for the respective periods presented:


(In Thousands)	(In Thousands)	Three Months Ended				Nine Months Ended				(In Thousands)	Three Months Ended				Nine Months Ended
Purchases:	Purchases:	9/30/2022		9/30/2021		9/30/2022		9/30/2021		Purchases:	9/30/2023		9/30/2022		9/30/2023		9/30/2022
Available-for-Sale Portfolio	Available-for-Sale Portfolio									Available-for-Sale Portfolio

U.S. Agency Securities	U.S. Agency Securities	$	15,000	$	15,000	$	70,000	$	60,000	U.S. Agency Securities	$	—	$	15,000	$	—	$	70,000

Mortgage-Backed Securities	Mortgage-Backed Securities	24,625		76,608		79,674		162,089		Mortgage-Backed Securities	—		24,625		—		79,674

Total Purchases	Total Purchases	$	39,625	$	91,608	$	149,674	$	222,089	Total Purchases	$	—	$	39,625	$	—	$	149,674

Maturities & Calls	Maturities & Calls	$	18,960	$	40,245	$	61,620	$	93,332	Maturities & Calls	$	16,365	$	18,960	$	48,499	$	61,620


(In Thousands)	(In Thousands)	Three Months Ended				Nine Months Ended				(In Thousands)	Three Months Ended				Nine Months Ended
Purchases:	Purchases:	9/30/2022		9/30/2021		9/30/2022		9/30/2021		Purchases:	9/30/2023		9/30/2022		9/30/2023		9/30/2022
Held-to-Maturity Portfolio	Held-to-Maturity Portfolio									Held-to-Maturity Portfolio
State and Municipal Obligations	State and Municipal Obligations	$	4,802	$	991	$	10,293	$	4,695	State and Municipal Obligations	$	4,938	$	4,802	$	7,490	$	10,293

Maturities & Calls	Maturities & Calls	$	4,575	$	6,985	$	24,231	$	24,266	Maturities & Calls	$	7,721	$	4,575	$	41,919	$	24,231

Loan Trends

The following three tables present, for each of the last five quarters, the quarterly average balances by loan type, the percentage of total loans represented by each loan type and the annualized yield of each loan category:

Quarterly Average Loan Balances

(Dollars in Thousands)


		Quarter Ended											Quarter Ended
		9/30/2022		6/30/2022		3/31/2022		12/31/2021		9/30/2021			9/30/2023		6/30/2023		3/31/2023		12/31/2022		9/30/2022
Commercial excluding PPP Loans	Commercial excluding PPP Loans	$	134,986	$	130,177	$	135,472	$	127,346	$	133,448	Commercial excluding PPP Loans	$	147,585	$	135,370	$	135,670	$	141,419	$	134,986
PPP Loans	PPP Loans	637		11,267		26,086		48,778		82,042		PPP Loans	—		—		—		—		637
Commercial Real Estate	Commercial Real Estate	661,471		645,968		631,255		623,273		606,661		Commercial Real Estate	727,060		722,753		710,719		674,420		661,471
Consumer	Consumer	1,047,470		1,013,361		932,401		921,376		903,869		Consumer	1,094,994		1,081,838		1,070,314		1,065,467		1,047,470
Residential Real Estate	Residential Real Estate	1,027,502		1,003,407		953,582		939,892		915,706		Residential Real Estate	1,126,601		1,096,449		1,075,225		1,070,241		1,027,502
Total Loans	Total Loans	$	2,872,066	$	2,804,180	$	2,678,796	$	2,660,665	$	2,641,726	Total Loans	$	3,096,240	$	3,036,410	$	2,991,928	$	2,951,547	$	2,872,066

Percentage of Total Quarterly Average Loans


		Quarter Ended											Quarter Ended
		9/30/2022		6/30/2022		3/31/2022		12/31/2021		9/30/2021			9/30/2023		6/30/2023		3/31/2023		12/31/2022		9/30/2022
Commercial excluding PPP Loans		4.7	%	4.6	%	5.0	%	4.8	%	5.0	%
PPP Loans		—	%	0.4	%	1.0	%	1.8	%	3.1	%
Commercial												Commercial	4.8	%	4.5	%	4.5	%	4.8	%	4.7	%

Commercial Real Estate	Commercial Real Estate	23.0	%	23.0	%	23.6	%	23.4	%	23.0	%	Commercial Real Estate	23.5	%	23.8	%	23.8	%	22.8	%	23.0	%
Consumer	Consumer	36.5	%	36.2	%	34.8	%	34.6	%	34.2	%	Consumer	35.4	%	35.6	%	35.8	%	36.1	%	36.5	%
Residential Real Estate	Residential Real Estate	35.8	%	35.8	%	35.6	%	35.4	%	34.7	%	Residential Real Estate	36.3	%	36.1	%	35.9	%	36.3	%	35.8	%
Total Loans	Total Loans	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	Total Loans	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Quarterly Yield on Loans


		Quarter Ended											Quarter Ended
		9/30/2022		6/30/2022		3/31/2022		12/31/2021		9/30/2021			9/30/2023		6/30/2023		3/31/2023		12/31/2022		9/30/2022
Commercial (Total Portfolio)		4.17	%	3.93	%	4.17	%	3.97	%	4.81	%
Commercial excluding PPP loans		4.17	%	3.90	%	3.87	%	3.83	%	3.91	%
Commercial												Commercial	4.89	%	4.53	%	4.28	%	4.18	%	4.17	%

Commercial Real Estate	Commercial Real Estate	4.60	%	3.82	%	3.80	%	3.78	%	3.80	%	Commercial Real Estate	5.19	%	5.09	%	4.73	%	4.57	%	4.60	%
Consumer	Consumer	4.10	%	3.83	%	3.84	%	3.87	%	3.93	%	Consumer	4.83	%	4.61	%	4.26	%	4.02	%	4.10	%
Residential Real Estate	Residential Real Estate	3.78	%	3.70	%	3.71	%	3.73	%	3.76	%	Residential Real Estate	4.26	%	4.17	%	4.10	%	3.80	%	3.78	%
Total Loans	Total Loans	4.09	%	3.85	%	3.90	%	3.82	%	4.08	%	Total Loans	4.70	%	4.57	%	4.32	%	4.13	%	4.09	%

The average yield on the loan portfolio was ~~4.09%~~4.70% for the third quarter of ~~2022~~2023 up 2461 basis points from the ~~second~~third quarter of 2022. Market rates have ~~increased in 2022,~~continued to increase, which impacts new loan yields for fixed rate loans, and variable loan yields as these loans reach their repricing dates. Commercial loan yields in the third quarter were affected by higher market rates and fees received on a loan prepayment. Consumer loan yields were affected by a $536 thousand amortization adjustment that occurred in the quarter. Residential real estate yields are anticipated to increase for the remainder of 2022, consistent with recent overall market behavior as well as the effect of variable home equity loans.

5965

The table below shows the maturity of loans outstanding as of September 30, ~~2022.~~2023. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):


		September 30, 2022											September 30, 2023
		Within One Year		After One But Within Five Years		After Five But Within 15 Years		After 15 Years		Total			Within One Year		After One But Within Five Years		After Five But Within 15 Years		After 15 Years		Total
Commercial	Commercial	$	26,376	$	73,962	$	38,530	$	105	$	138,973	Commercial	$	34,271	$	76,654	$	37,009	$	133	$	148,067
Commercial Real Estate	Commercial Real Estate	165,626		212,427		197,190		103,974		679,217		Commercial Real Estate	165,207		250,838		311,799		6,759		734,603
Consumer	Consumer	34,776		485,441		534,887		481		1,055,585		Consumer	10,103		575,306		521,771		458		1,107,638
Residential Real Estate	Residential Real Estate	159,979		52,046		207,456		631,538		1,051,019		Residential Real Estate	129,482		62,883		278,619		677,325		1,148,309
Total	Total	$	386,757	$	823,876	$	978,063	$	736,098	$	2,924,794	Total	$	339,063	$	965,681	$	1,149,198	$	684,675	$	3,138,617

				After One But Within Five Years		After Five But Within 15 Years		After 15 Years		Total					After One But Within Five Years		After Five But Within 15 Years		After 15 Years		Total
Loans maturing with:	Loans maturing with:											Loans maturing with:
Fixed Interest Rates	Fixed Interest Rates			$	562,013	$	933,889	$	638,900	$	2,134,802	Fixed Interest Rates			$	671,819	$	907,507	$	681,507	$	2,260,833
Variable Interest Rates	Variable Interest Rates			261,863		44,174		97,198		403,235		Variable Interest Rates			293,862		241,691		3,168		538,721
Total	Total			$	823,876	$	978,063	$	736,098	$	2,538,037	Total			$	965,681	$	1,149,198	$	684,675	$	2,799,554

Maintenance of High Quality Credit in the Loan Portfolio: There have been no significant fluctuations in the quality of the loan portfolio or any segment thereof. In general, residential real estate loans have historically been underwritten to secondary market standards for prime loans and Arrow has not engaged in subprime mortgage lending as a business line. Similarly, high underwriting standards have generally been applied to commercial and commercial real estate lending operations and generally in the indirect lending program as well.

Commercial Loans and Commercial Real Estate Loans: Substantially all commercial and commercial real estate loans in the loan portfolio were extended to businesses or borrowers located in Arrow's regional markets. A portion of the loans in the commercial portfolio have variable rates tied to market indices, such as Prime, ~~LIBOR~~SOFR or FHLBNY. PPP loans were previously included within the commercial loan portfolio. ~~There were no~~The PPP ~~loans outstanding as of September 30,~~program ended in 2022.

Consumer Loans: At September 30, ~~2022,~~2023, consumer loans (primarily automobile loans originated through dealerships located in upstate New York and Vermont) continue to be a significant component of Arrow's business, comprising approximately one third of the total loan portfolio.

~~New consumer loan volume for the first nine months of 2022 was $467.0 million, up from the $364.8 million originated in the first nine months of 2021.~~

For credit quality purposes, Arrow assigns potential automobile loan customers into one of four tiers, ranging from lower to higher quality in terms of anticipated credit risk. Arrow's experienced lending staff not only utilizes credit evaluation software tools but also reviews and evaluates each loan individually prior to the loan being funded. Arrow believes that this disciplined approach to evaluating risk has contributed to maintaining the strong credit quality in this portfolio.

Residential Real Estate Loans: Gross originations for residential real estate loans (including refinancings of mortgage loans) for the first nine months of 2022 were $175.0 million, as compared to $174.2 million for the first nine months of 2021. Strong demand for residential real estate has continued even as interest rates have increased. ~~The~~Although the projected ongoing rise in the interest rates may impact future demand. Arrow has ~~also~~historically sold portions of ~~these~~ originations in the secondary market. In the first nine months of 2022, Arrow sold $4.1 million, or 2.3%, of originations while retaining the mortgage servicing rights. In the first nine months of 2021, $48.7 million, or 27.9%, of originations were sold. Sales decreased as the result of the strategic decision to grow the residential loan ~~portfolio.~~portfolio as well as current market conditions. The rate at which mortgage loan originations are sold in future periods will depend on a variety of factors, including demand for residential mortgages in our operating markets, market conditions for mortgage sales and strategic balance sheet and interest-rate risk management decisions.

Deposit Trends

The following tables provide information on trends in the balance and mix of the deposit portfolio by presenting, for each of the last five quarters, the quarterly average balances by deposit type and the percentage of total deposits represented by each deposit type. The quarterly average balances have declined from the 4th quarter of ~~both noninterest-bearing deposits~~2022 as well as the comparable 2022 quarter. In addition, due to the current rate environment and ~~interest-bearing checking and savings accounts have~~ increased ~~from prior year levels. Time deposits over $250,000 and other time~~competitive pricing, deposits have ~~decreased for the four quarters leading into the third quarter of 2022. In the current quarter, the balance of~~also migrated to higher cost time ~~deposits has increased as the result of a strategic initiative to grow certificate of deposit balances.~~deposits.

6066


Quarterly Average Deposit Balances
(Dollars in Thousands)

	Quarter Ended
	9/30/2023		6/30/2023		3/31/2023		12/31/2022		9/30/2022
Noninterest-Bearing Deposits	$	779,037	$	756,584	$	798,576	$	787,157	$	866,659
Interest-Bearing Checking Accounts	795,627		863,892		964,735		1,082,267		996,116
Savings Deposits	1,505,916		1,504,412		1,474,251		1,548,293		1,549,451
Time Deposits over $250,000	152,738		133,897		94,415		65,897		49,459
Other Time Deposits	257,710		201,926		148,302		131,331		136,834
Total Deposits	$	3,491,028	$	3,460,711	$	3,480,279	$	3,614,945	$	3,598,519

Quarterly Average Deposit Balances
(Dollars in Thousands)
Quarter Ended
9/30/2022 6/30/2022 3/31/2022 12/31/2021 9/30/2021
Noninterest-Bearing Deposits $ 866,659 $ 811,607 $ 794,968 $ 819,624 $ 802,837
Interest-Bearing Checking Accounts 996,116 1,048,752 1,027,740 998,398 923,002
Savings Deposits 1,549,451 1,541,616 1,557,855 1,562,318 1,496,938
Time Deposits over $250,000 49,459 37,418 70,101 71,965 71,435
Other Time Deposits 136,834 130,361 131,592 138,461 141,721
Total Deposits $ 3,598,519 $ 3,569,754 $ 3,582,256 $ 3,590,766 $ 3,435,933


		Quarter Ended											Quarter Ended
		9/30/2022		6/30/2022		3/31/2022		12/31/2021		9/30/2021			9/30/2023		6/30/2023		3/31/2023		12/31/2022		9/30/2022
Non-Municipal Deposits	Non-Municipal Deposits	$	2,719,591	$	2,662,052	$	2,639,258	$	2,629,553	$	2,590,678	Non-Municipal Deposits	$	2,629,532	$	2,528,871	$	2,567,132	$	2,668,704	$	2,719,291
Municipal Deposits	Municipal Deposits	879,228		907,702		942,998		961,213		845,255		Municipal Deposits	861,496		931,840		913,147		946,241		879,228
Total Deposits	Total Deposits	$	3,598,819	$	3,569,754	$	3,582,256	$	3,590,766	$	3,435,933	Total Deposits	$	3,491,028	$	3,460,711	$	3,480,279	$	3,614,945	$	3,598,519

Percentage of Total Quarterly Average Deposits


		Quarter Ended											Quarter Ended
		9/30/2022		6/30/2022		3/31/2022		12/31/2021		9/30/2021			9/30/2023		6/30/2023		3/31/2023		12/31/2022		9/30/2022
Noninterest-Bearing Deposits	Noninterest-Bearing Deposits	24.1	%	22.7	%	22.2	%	22.8	%	23.4	%	Noninterest-Bearing Deposits	22.3	%	21.9	%	22.9	%	21.8	%	24.1	%
Interest-Bearing Checking Accounts	Interest-Bearing Checking Accounts	27.7	%	29.4	%	28.7	%	27.8	%	26.9	%	Interest-Bearing Checking Accounts	22.8	%	25.0	%	27.7	%	29.9	%	27.7	%
Savings Deposits	Savings Deposits	43.0	%	43.2	%	43.4	%	43.5	%	43.5	%	Savings Deposits	43.1	%	43.4	%	42.4	%	42.9	%	43.0	%
Time Deposits over $250,000	Time Deposits over $250,000	1.4	%	1.0	%	2.0	%	2.0	%	2.1	%	Time Deposits over $250,000	4.4	%	3.9	%	2.7	%	1.8	%	1.4	%
Other Time Deposits	Other Time Deposits	3.8	%	3.7	%	3.7	%	3.9	%	4.1	%	Other Time Deposits	7.4	%	5.8	%	4.3	%	3.6	%	3.8	%
Total Deposits	Total Deposits	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	Total Deposits	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Quarterly Cost of Deposits


		Quarter Ended											Quarter Ended
		9/30/2022		6/30/2022		3/31/2022		12/31/2021		9/30/2021			9/30/2023		6/30/2023		3/31/2023		12/31/2022		9/30/2022
Demand Deposits	Demand Deposits	—	%	—	%	—	%	—	%	—	%	Demand Deposits	—	%	—	%	—	%	—	%	—	%
Interest-Bearing Checking Accounts	Interest-Bearing Checking Accounts	0.11	%	0.08	%	0.06	%	0.07	%	0.07	%	Interest-Bearing Checking Accounts	0.58	%	0.38	%	0.16	%	0.13	%	0.11	%
Savings Deposits	Savings Deposits	0.63	%	0.23	%	0.11	%	0.10	%	0.11	%	Savings Deposits	2.56	%	2.27	%	1.54	%	1.05	%	0.63	%
Time Deposits over $250,000	Time Deposits over $250,000	0.71	%	0.28	%	0.16	%	0.18	%	0.22	%	Time Deposits over $250,000	3.81	%	3.35	%	2.47	%	1.36	%	0.71	%
Other Time Deposits	Other Time Deposits	0.43	%	0.34	%	0.33	%	0.35	%	0.37	%	Other Time Deposits	3.16	%	2.38	%	1.30	%	0.71	%	0.43	%
Total Deposits	Total Deposits	0.33	%	0.14	%	0.08	%	0.08	%	0.09	%	Total Deposits	1.64	%	1.35	%	0.82	%	0.54	%	0.33	%

For the quarter ended September 30, ~~2022,~~2023, the total cost of deposits increased 1929 basis points from the previous quarter and 131 basis points from the comparable prior year quarter. The Federal Funds rate ~~began~~has continued to increase induring the ~~first quarter of 2022 and is anticipated to continue to increase into 2023.~~previous five quarters presented. Arrow is well positioned for a variety of rate environments, see Part I, Item 3, entitled "Quantitative and Qualitative Disclosures About Market Risk," on page 7278 for further discussion.

Non-Deposit Sources of Funds

Arrow's other sources of funds ~~have previously included~~include securities sold under agreements to repurchase, ~~and~~ term advances from the ~~FHLBNY.~~FHLBNY and BTFP advances. The securities sold under agreements to repurchase are offered to existing customers, short-term in nature and are collateralized by investment securities. The remaining term ~~advances~~advance from the FHLBNY ~~are~~is a fixed rate non-callable advance that will mature within one year. The BTFP advances ~~with original maturities~~mature in less than 12 months and have a weighted average interest rate of ~~three to five years.~~4.83%.

The $20 million principal amount of Junior Subordinated Obligations Issued to Unconsolidated Subsidiary Trusts listed on the consolidated balance sheet as of September 30, ~~2022~~2023 (i.e., previously issued TRUPs) will, subject to certain limits, continue to qualify as Tier 1 regulatory capital for Arrow until such TRUPs mature or are redeemed. This is further discussed under "Capital Resources" beginning on page 6470 of this Report.

6167

ASSET QUALITY

The following table presents information related to the allowance and provision for credit losses for the past five quarters:

Summary of the Allowance and Provision for Credit Losses

(Dollars in Thousands, Loans Stated Net of Unearned Income)


		9/30/2022			6/30/2022			3/31/2022			12/31/2021			9/30/2021				9/30/2023			6/30/2023			3/31/2023			12/31/2022			9/30/2022
Loan Balances:	Loan Balances:																Loan Balances:
Period-End Loans	Period-End Loans	$	2,924,794		$	2,844,802		$	2,737,267		$	2,667,941		$	2,654,751		Period-End Loans	$	3,138,617		$	3,069,897		$	3,005,352		$	2,983,207		$	2,924,794
Average Loans, Year-to-Date	Average Loans, Year-to-Date	2,785,721			2,741,834			2,678,796			2,643,163			2,637,265			Average Loans, Year-to-Date	3,041,909			3,014,292			2,991,928			2,827,518			2,785,721
Average Loans, Quarter-to-Date	Average Loans, Quarter-to-Date	2,872,066			2,804,180			2,678,796			2,660,665			2,641,726			Average Loans, Quarter-to-Date	3,096,240			3,036,410			2,991,928			2,951,547			2,872,066
Period-End Assets	Period-End Assets	4,232,778			3,991,205			4,156,402			4,027,952			4,071,104			Period-End Assets	4,272,911			4,103,653			4,114,630			3,969,509			4,232,778

Allowance for Credit Losses, Year-to-Date:	Allowance for Credit Losses, Year-to-Date:																Allowance for Credit Losses, Year-to-Date:
Allowance for Credit Losses, Beginning of Period	Allowance for Credit Losses, Beginning of Period	$	27,281		$	27,281		$	27,281		$	29,232		$	29,232		Allowance for Credit Losses, Beginning of Period	$	29,952		$	29,952		$	29,952		$	27,281		$	27,281
Impact of the Adoption of ASU 2016-13		—			—			—			(1,300)			(1,300)

Provision for Credit Losses, YTD	Provision for Credit Losses, YTD	3,389			1,674			769			272			(286)			Provision for Credit Losses, YTD	2,856			2,502			1,554			4,798			3,389
Loans Charged-off, YTD	Loans Charged-off, YTD	(2,883)			(1,736)			(829)			(2,239)			(1,520)			Loans Charged-off, YTD	(3,812)			(2,608)			(1,328)			(4,143)			(2,883)
Recoveries of Loans Previously Charged-off	Recoveries of Loans Previously Charged-off	1,445			871			440			1,316			830			Recoveries of Loans Previously Charged-off	2,116			1,324			606			2,016			1,445
Net Charge-offs, YTD	Net Charge-offs, YTD	(1,438)			(865)			(389)			(923)			(690)			Net Charge-offs, YTD	(1,696)			(1,284)			(722)			(2,127)			(1,438)
Allowance for Credit Losses, End of Period	Allowance for Credit Losses, End of Period	$	29,232		$	28,090		$	27,661		$	27,281		$	26,956		Allowance for Credit Losses, End of Period	$	31,112		$	31,170		$	30,784		$	29,952		$	29,232

Allowance for Credit Losses, Quarter-to-Date:	Allowance for Credit Losses, Quarter-to-Date:																Allowance for Credit Losses, Quarter-to-Date:
Allowance for Credit Losses, Beginning of Period	Allowance for Credit Losses, Beginning of Period	$	28,090		$	27,661		$	27,281		$	26,956		$	27,010		Allowance for Credit Losses, Beginning of Period	$	31,170		$	30,784		$	29,952		$	29,232		$	28,090

Provision for Credit Losses, QTD	Provision for Credit Losses, QTD	1,715			905			769			558			99			Provision for Credit Losses, QTD	354			948			1,554			1,409			1,715
Loans Charged-off, QTD	Loans Charged-off, QTD	(1,147)			(907)			(829)			(719)			(444)			Loans Charged-off, QTD	(1,204)			(1,280)			(1,328)			(1,261)			(1,147)
Recoveries of Loans Previously Charged-off	Recoveries of Loans Previously Charged-off	574			431			440			486			291			Recoveries of Loans Previously Charged-off	792			718			606			572			574
Net Charge-offs, QTD	Net Charge-offs, QTD	(573)			(476)			(389)			(233)			(153)			Net Charge-offs, QTD	(412)			(562)			(722)			(689)			(573)
Allowance for Credit Losses, End of Period	Allowance for Credit Losses, End of Period	$	29,232		$	28,090		$	27,661		$	27,281		$	26,956		Allowance for Credit Losses, End of Period	$	31,112		$	31,170		$	30,784		$	29,952		$	29,232

Nonperforming Assets, at Period-End:	Nonperforming Assets, at Period-End:																Nonperforming Assets, at Period-End:
Nonaccrual Loans	Nonaccrual Loans	$	8,812		$	7,999		$	9,750		$	10,764		$	10,723		Nonaccrual Loans	$	6,023		$	5,997		$	10,852		$	10,757		$	8,812
Loans Past Due 90 or More Days and Still Accruing Interest	Loans Past Due 90 or More Days and Still Accruing Interest	514			1,641			55			823			555			Loans Past Due 90 or More Days and Still Accruing Interest	251			467			241			1,157			514
Restructured and in Compliance with Modified Terms	Restructured and in Compliance with Modified Terms	82			77			74			77			67			Restructured and in Compliance with Modified Terms	60			67			62			69			82
Total Nonperforming Loans	Total Nonperforming Loans	9,408			9,717			9,879			11,664			11,345			Total Nonperforming Loans	6,334			6,531			11,155			11,983			9,408
Repossessed Assets	Repossessed Assets	604			297			180			126			272			Repossessed Assets	344			342			144			593			604
Other Real Estate Owned	Other Real Estate Owned	—			—			—			—			79			Other Real Estate Owned	182			182			—			—			—
Total Nonperforming Assets	Total Nonperforming Assets	$	10,012		$	10,014		$	10,059		$	11,790		$	11,696		Total Nonperforming Assets	$	6,860		$	7,055		$	11,299		$	12,576		$	10,012

Asset Quality Ratios:	Asset Quality Ratios:																Asset Quality Ratios:
Allowance to Nonperforming Loans	Allowance to Nonperforming Loans	310.71		%	289.08		%	280.00		%	233.89		%	237.60		%	Allowance to Nonperforming Loans	491.19		%	477.26		%	275.97		%	249.95		%	310.71		%
Allowance to Period-End Loans	Allowance to Period-End Loans	1.00		%	0.99		%	1.01		%	1.02		%	1.02		%	Allowance to Period-End Loans	0.99		%	1.02		%	1.02		%	1.00		%	1.00		%
Provision to Average Loans (Quarter) (1)	Provision to Average Loans (Quarter) (1)	0.24		%	0.13		%	0.12		%	0.08		%	0.01		%	Provision to Average Loans (Quarter) (1)	0.05		%	0.13		%	0.21		%	0.19		%	0.24		%
Provision to Average Loans (YTD) (1)	Provision to Average Loans (YTD) (1)	0.16		%	0.12		%	0.12		%	0.01		%	(0.01)		%	Provision to Average Loans (YTD) (1)	0.13		%	0.17		%	0.21		%	0.17		%	0.16		%
Net Charge-offs to Average Loans (Quarter) (1)	Net Charge-offs to Average Loans (Quarter) (1)	0.08		%	0.07		%	0.06		%	0.03		%	0.02		%	Net Charge-offs to Average Loans (Quarter) (1)	0.05		%	0.07		%	0.10		%	0.09		%	0.08		%
Net Charge-offs to Average Loans (YTD) (1)	Net Charge-offs to Average Loans (YTD) (1)	0.07		%	0.06		%	0.06		%	0.03		%	0.03		%	Net Charge-offs to Average Loans (YTD) (1)	0.07		%	0.09		%	0.10		%	0.08		%	0.07		%
Nonperforming Loans to Total Loans	Nonperforming Loans to Total Loans	0.32		%	0.34		%	0.36		%	0.44		%	0.43		%	Nonperforming Loans to Total Loans	0.20		%	0.21		%	0.37		%	0.40		%	0.32		%
Nonperforming Assets to Total Assets	Nonperforming Assets to Total Assets	0.24		%	0.25		%	0.24		%	0.29		%	0.29		%	Nonperforming Assets to Total Assets	0.16		%	0.17		%	0.27		%	0.32		%	0.24		%
(1) Annualized	(1) Annualized																(1) Annualized

Provision for Credit Losses

Arrow loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with certain criticized and classified commercial-related relationships. In addition, the independent internal loan review department performs periodic reviews of the credit quality indicators on individual loans in the commercial loan portfolio.

~~Arrow adopted CECL on January 1, 2021.~~ CECL calculates losses over the life of a loan or financial instrument. Arrow and its subsidiaries utilize a loss projection model updated with data from our core systems, and incorporates various assumptions to produce the CECL reserve. A CECL Steering Committee was created to provide a management governance function to review, critically

challenge and approve components of the CECL reporting process. One key responsibility of the CECL Steering Committee is to review annually the key assumptions utilized in

the CECL calculation including loan segmentation, loan loss regression analysis, reasonable and supportable forecast period, reversion period, discounted cash flow inputs including economic forecast data and prepayment and curtailment speeds and qualitative factors.

The September 30, ~~2022~~2023 allowance for credit losses calculation incorporated a reasonable and supportable forecast period to account for economic conditions utilized in the measurement. The quantitative model utilized an economic forecast sourced from reputable third-parties that reflects the economic conditions with a slight ~~deterioration of approximately 0.45%~~improvement in the national unemployment rate of approximately 0.33% during the six-quarter forecast period, while forecasted gross domestic product ~~are~~ projected ~~to decline~~a deterioration of approximately ~~1.0%~~0.42%. The home price index (HPI) forecast declined approximately ~~4.63%~~1.60% from the previous quarter level. Driven by current economic forecasts, loan growth and net charge offs during the quarter, the third quarter provision for credit losses was ~~$1.7 million.~~$354 thousand. The provision is directionally consistent with both the latest economic forecasts as well as third quarter ~~2022~~ activity. ~~For the the third quarter of 2021, a provision of $99 thousand was recorded.~~ In addition, Arrow recorded ~~an expense~~a credit for estimated credit losses on off-balance sheet credit exposures in other liabilities of ~~$30~~$192 thousand in the third quarter of ~~2022.~~2023.

See Notes 1 and 45 to the unaudited interim consolidated financial statements for additional discussion related to CECL.

The ratio of the allowance for credit losses to total loans was 0.99% at September 30, 2023, a decrease from 1.00% at December 31, 2022 and 1.00% at September 30, ~~2022, a decrease from 1.02% at December 31, 2021 and September 30, 2021.~~2022.

The accounting policy relating to the allowance for credit losses is considered to be a critical accounting policy, given the uncertainty involved in evaluating the level of the allowance required to cover credit losses in the loan portfolio, and the material effect that such judgments may have on the results of operations. The process for determining the provision for credit losses is described in Note 45 to the unaudited interim consolidated financial statements.

Risk Elements

Nonperforming assets at September 30, ~~2022~~2023 amounted to ~~$10.0~~$6.9 million, a decrease from the ~~$11.8~~$12.6 million total at December 31, ~~2021~~2022 and ~~the $11.7~~$10.0 million total at September 30, ~~2021.~~2022. For the three month periods ended September 30, ~~2022~~2023 and ~~2021,~~2022, ratios of nonperforming assets to total assets have remained ~~below~~fairly consistent to the average ratios for the peer group. (See page 4549 for a discussion of the peer group.) At June 30, ~~2022,~~2023, the ratio of loans past due 90 or more days plus nonaccrual loans plus other real estate owned to total assets was ~~0.25%, below~~0.17% as compared to the ~~0.31%~~0.30% ratio of the peer group at such date (the latest date for which peer group information is available). At September 30, ~~2022~~2023 the ratio was ~~0.24%~~0.16%.

The following table presents the balance of other non-current loans at period-end as to which interest income was being accrued (i.e., loans 30 to 89 days past due, as defined in bank regulatory guidelines). These non-current loans are not included in nonperforming assets, but entail heightened risk:


Loans Past Due 30-89 Days and Accruing Interest ($ in 000's)	Loans Past Due 30-89 Days and Accruing Interest ($ in 000's)							Loans Past Due 30-89 Days and Accruing Interest ($ in 000's)
		9/30/2022		12/31/2021		9/30/2021			9/30/2023		12/31/2022		9/30/2022
Commercial Loans	Commercial Loans	$	156	$	205	$	792	Commercial Loans	$	306	$	450	$	156
Commercial Real Estate Loans	Commercial Real Estate Loans	—		—		—		Commercial Real Estate Loans	15,764		—		—
Residential Real Estate Loans	Residential Real Estate Loans	1,456		2,663		1,663		Residential Real Estate Loans	1,711		1,779		1,456
Consumer Loans - Primarily Indirect Automobile	Consumer Loans - Primarily Indirect Automobile	13,268		9,302		7,287		Consumer Loans - Primarily Indirect Automobile	16,817		18,175		13,268
Total Loans Past Due 30-89 Days and Accruing Interest	Total Loans Past Due 30-89 Days and Accruing Interest	$	14,880	$	12,170	$	9,742	Total Loans Past Due 30-89 Days and Accruing Interest	$	34,598	$	20,404	$	14,880

At September 30, ~~2022,~~2023, the loans in the above-referenced category totaled ~~$14.9~~$34.6 million, an increase of ~~$2.7~~$14.2 million, or ~~22.3%~~69.6%, from the ~~$12.2~~$20.4 million of such loans at December 31, ~~2021.~~2022. The increase is primarily due to a single commercial real estate loan that was delinquent as of September 30, 2023. The loan will be continued to be monitored in the fourth quarter. The September 30, ~~2022~~2023 total of non-current loans equaled ~~0.51%~~1.10% of loans then outstanding, compared to ~~0.46%~~0.68% at December 31, ~~2021~~2022 and ~~0.37%~~0.51% at September 30, ~~2021. The change from September 30, 2021 is primarily attributable to COVID-19 pandemic stimulus which occurred in 2021.~~2022.

The number and dollar amount of performing loans that demonstrate characteristics of potential weakness from time-to-time (potential problem loans) typically is a very small percentage of the loan portfolio. See the table of Credit Quality Indicators in Note 4 to the unaudited interim consolidated financial statements. Arrow considers all performing commercial and commercial real estate loans classified as substandard or lower (as reported in Note 4) to be potential problem loans. These loans will continue to be closely monitored and Arrow expects to collect all payments of contractual principal and interest in full on these classified loans.

As of September 30, ~~2022,~~2023, Arrow held noone other real estate ~~owned.~~owned property. At this time, Arrow does not expect to acquire a significant number of other real estate properties in the near term as a result of payment defaults or the foreclosure process.

6369

~~PPP Loans~~

Arrow originated approximately $234.2 million of PPP loans in 2020 and 2021. The PPP loans had an interest rate of 1%. The original term on the PPP loans is two years, however the borrower has the option to apply for forgiveness. Subsequent to the funding of the loans, additional guidance was provided that the term of the loan may be extended to five years if both parties agree to the revised terms. Arrow recognizes the fees earned over the life of the loan and accelerates recognition of the fees as the loans are forgiven by the Small Business Administration. As of September 30, 2022, there were no PPP loans outstanding.


~~Outstanding PPP Loans as of September 30, 2022~~ ~~(Dollars In Thousands)~~
~~PPP Loans Funded to Date~~	$	~~234,196~~
~~PPP Loans Forgiven~~	~~(234,196)~~
~~Outstanding PPP Loans~~	$	—

Income Earned on PPP Loans for the Periods Ended
September 30, 2022
(Dollars In Thousands)
Three Months Ended Nine Months Ended
Interest Earned at Rate of 1% $ 1 $ 97
Fees Recognized 69 1,477
Income Earned on PPP Loans $ 70 $ 1,574

CAPITAL RESOURCES

Regulatory Capital Standards

Capital Adequacy Requirements. An important area of banking regulation is the federal banking system's promulgation and enforcement of minimum capitalization standards for banks and bank holding companies.

As reported in the Regulatory Reform section above, Arrow elected to opt out of utilizing the CBLR framework. The Capital Rules ~~will~~ remain applicable to Arrow.

The following is a summary of certain definitions of capital under the various capital measures in the Capital Rules:

Common Equity Tier 1 Capital (CET1): Equals the sum of common stock instruments and related surplus (net of treasury stock), retained earnings, accumulated other comprehensive income (AOCI), and qualifying minority interests, minus applicable regulatory adjustments and deductions. Such deductions will include AOCI, if the organization has exercised its irrevocable option not to include AOCI in capital (Arrow made such an election). Mortgage-servicing assets, deferred tax assets, and investments in financial institutions are limited to 15% of CET1 in the aggregate and 10% of CET1 for each such item individually.

Additional Tier 1 Capital: Equals the sum of noncumulative perpetual preferred stock, tier 1 minority interests, grandfathered TRUPs, and Troubled Asset Relief Program instruments, minus applicable regulatory adjustments and deductions.

Tier 2 Capital: Equals the sum of subordinated debt and preferred stock, total capital minority interests not included in Tier 1, and allowance for loan and lease losses (not exceeding 1.25% of risk-weighted assets) minus applicable regulatory adjustments and deductions.

The following table presents the minimum regulatory capital ratios applicable to Arrow and its subsidiary banks under the current Capital Rules:


Capital Ratio	~~2022~~2023
Minimum CET1 Ratio	4.500	%
Capital Conservation Buffer ("Buffer")	2.500	%
Minimum CET1 Ratio Plus Buffer	7.000	%
Minimum Tier 1 Risk-Based Capital Ratio	6.000	%
Minimum Tier 1 Risk-Based Capital Ratio Plus Buffer	8.500	%
Minimum Total Risk-Based Capital Ratio	8.000	%
Minimum Total Risk-Based Capital Ratio Plus Buffer	10.500	%
Minimum Leverage Ratio	4.000	%

These minimum capital ratios, especially the minimum CET1 ratio (4.5%) and the enhanced minimum Tier 1 risk-based capital ratio (6.0%), represent a heightened and more restrictive capital regime than institutions like Arrow previously had to meet under the prior capital rules.

At September 30, ~~2022,~~2023, Arrow and its subsidiary banks exceeded by a substantial amount each of the applicable minimum capital ratios established under the Capital Rules, including the minimum CET1 Ratio, the minimum Tier 1 Risk-Based Capital Ratio, the minimum Total Risk-Based Capital Ratio, and the minimum Leverage Ratio, including in the case of each risk-based ratio, the capital buffer.

Prompt Corrective Action Capital Classifications. Under applicable banking law, federal banking regulators are required to take prompt corrective action with respect to depository institutions that do not meet certain minimum capital requirements. For these purposes, the regulators have established five capital classifications for banking institutions, ranging from the highest category of "well-capitalized" to the lowest category of "critically under-capitalized". Under the current capital classifications, a banking institution is considered "well-capitalized" if it meets the following capitalization standards on the date of measurement: a CET1 risk-based capital ratio of 6.50% or greater, a Tier 1 risk-based capital ratio of 8.00% or greater, a total risk-based capital ratio of 10.00% or greater, and a Tier 1 leverage ratio of 5.00% or greater, provided the institution is not subject to any regulatory order or written directive regarding capital maintenance. Federal banking law also ties the ability of banking organizations to engage in certain types of activities and to utilize certain procedures to such organizations' continuing to qualify for inclusion in one of the two highest rankings of these capitalization categories, i.e., as "well-capitalized" or "adequately capitalized."

Current Capital Ratios: The table below sets forth the regulatory capital ratios of Arrow and its subsidiary banks under the current Capital Rules, as of September 30, ~~2022:~~2023:

Common Equity Tier 1 Capital Ratio Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio Tier 1 Leverage Ratio
Arrow Financial Corporation 13.14 % 13.85 % 14.93 % 9.71 %
Glens Falls National Bank & Trust Co. 13.05 % 13.05 % 14.09 % 9.05 %
Saratoga National Bank & Trust Co. 14.47 % 14.47 % 15.72 % 10.35 %
FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019) 6.50 % 8.00 % 10.00 % 5.00 %
Regulatory Minimum
7.00%(1)
8.50%(1)
10.50%(1)
4.00 %
(1) Including the fully phased-in 2.50% capital conservation buffer


	Common Equity Tier 1 Capital Ratio		Tier 1 Risk-Based Capital Ratio		Total Risk-Based Capital Ratio		Tier 1 Leverage Ratio
Arrow Financial Corporation	13.17	%	13.84	%	14.94	%	9.94	%
Glens Falls National Bank & Trust Co.	13.44	%	13.44	%	14.49	%	9.28	%
Saratoga National Bank & Trust Co.	13.09	%	13.09	%	14.33	%	9.97	%

FDICIA's Prompt Corrective Action - "Well-Capitalized" Standard (2019)	6.50	%	8.00	%	10.00	%	5.00	%
Regulatory Minimum	7.00%(1)		8.50%(1)		10.50%(1)		4.00	%

(1) Including the fully phased-in 2.50% capital conservation buffer

At September 30, ~~2022,~~2023, Arrow and its subsidiary banks exceeded the minimum regulatory capital ratios established under the current Capital Rules and each also qualified as "well-capitalized", the highest category in the new capital classification scheme established by federal bank regulatory agencies under the "prompt corrective action" standards, as described above.

Capital Components; Stock Repurchases; Dividends

Stockholders' Equity: Stockholders’ equity was ~~$345.6~~$360.0 million at September 30, ~~2022, a decrease~~2023, an increase of ~~$25.6~~$6.5 million, or ~~6.9%~~1.8%, from the December 31, ~~2021~~2022 level of ~~$371.2~~$353.5 million, and ~~a decrease~~an increase of ~~$14.6~~$14.5 million, or ~~4.1%~~4.2%, from the prior-year level. The ~~decrease~~increase in stockholders' equity over the first nine months of ~~2022~~2023 principally reflected the following factors: the addition of (i) ~~$36.7~~$22.4 million of net income for the period plus (ii) the issuance of ~~$2.8~~$1.3 million of common stock through employee benefit and dividend reinvestment plans reduced by ~~(iv)~~(iii) other comprehensive loss of ~~$49.4~~$2.9 million, ~~(v)~~(iv) cash dividends of ~~$13.0~~$13.4 million and ~~(vi)~~(v) repurchases of common stock of $2.7 million. The majority of other comprehensive loss, $52.8 million, relates to net unrealized losses on AFS debt securities which occurred during the first half of 2022, partially offset by a net unrealized gain on cash flow swap and amortization related to defined benefit pension items.$848 thousand.

Trust Preferred Securities: In each of 2003 and 2004, Arrow issued $10 million of ~~TRUPs~~trust preferred securities (TRUPs) in a private placement. Under the Federal Reserve Board's regulatory capital rules then in effect, TRUPs proceeds typically qualified as Tier 1 capital for bank holding companies such as Arrow, but only in amounts up to 25% of Tier 1 capital, net of goodwill less any associated deferred tax liability. Under the ~~the~~ Dodd-Frank ~~Wall Street Reform and Consumer Protection~~ Act, ~~(Dodd-Frank),~~ any trust preferred securities that Arrow might issue on or after the grandfathering date ~~of May 19, 2010~~ set forth in Dodd-Frank ~~(the Grandfathering Cutoff)~~(May 19, 2010) would not qualify as Tier 1 capital under bank regulatory capital guidelines. For Arrow, TRUPs outstanding prior to the ~~Grandfathering Cutoff~~grandfathering cutoff date set forth in Dodd-Frank (May 19, 2010) would continue to qualify as Tier 1 capital until maturity or redemption, subject to limitations. Thus, Arrow's outstanding TRUPs continue to qualify as Tier 1 regulatory capital, subject to such limitations.

In the first quarter of 2020, Arrow entered into interest rate swap agreements to synthetically fix the variable rate interest payments associated with $20 million in outstanding subordinated trust securities. The effective fixed rate is 3.43% until maturity. These agreements are designated as cash flow hedges.

Stock Repurchase Program: In October ~~2021,~~2023, the Board of Directors ~~approved a~~expanded the 2023 Repurchase Program by $5 million, ~~stock~~bringing the total availability under the repurchase program ~~effective for~~to $9.1 million, and removed the ~~period January 1, 2022 through December 31, 2022 (the 2022 Repurchase Program), under which management is authorized, in its discretion, to permit Arrow to~~expiration date previously incorporated into the existing repurchase ~~up to $5 million of~~program. The Company did not repurchase any shares ~~of Arrow's common stock,~~ in the open market or in privately negotiated transactions, to the extent management believes Arrow's stock is reasonably priced and such repurchases appear to be an attractive use of available capital and in the best interests of shareholders. As ofthird quarter however through September 30, ~~2022,~~2023, Arrow had repurchased ~~$2.5 million~~$848 thousand of common stock under the ~~2022~~2023 Repurchase Program. This repurchase arrangement does not include repurchases of Arrow's common stock other than through its ~~2022~~2023 Repurchase Program, i.e., repurchases of Arrow shares on the market utilizing funds accumulated under Arrow's Dividend Reinvestment Plan and the surrender or deemed surrender of Arrow stock to ~~the Company~~Arrow in connection with

employees' stock-for-stock exercises of compensatory stock options to buy Arrow stock. The Board of Directors of Arrow recently approved a new stock repurchase program authorizing the repurchase, at the discretion of senior management, of up to $5 million of the Company’s common stock over the 2023 calendar year, in open-market or negotiated transactions.

Dividends: Arrow's common stock is traded on NasdaqGS® under the symbol AROW. The high and low stock prices for the past seven quarters listed below represent actual sales transactions, as reported by NASDAQ. ~~On October 26, 2022, the Board of Directors declared a 2022 fourth quarter cash dividend of $0.27 payable on December 15, 2022.~~ Per share amounts and share counts in the following tables have been restated for the September ~~23, 2022~~26, 2023 3% stock dividend.


						Cash							Cash
		Market Price				Dividends			Market Price				Dividends
		Low		High		Declared			Low		High		Declared
2021
2022								2022
First Quarter	First Quarter	$	27.01	$	34.39	$	0.245	First Quarter	$	30.28	$	34.86	$	0.255
Second Quarter	Second Quarter	31.31		36.06		0.245		Second Quarter	28.75		31.83		0.255
Third Quarter	Third Quarter	31.78		35.42		0.245		Third Quarter	27.84		33.90		0.255
Fourth Quarter	Fourth Quarter	32.77		37.13		0.252		Fourth Quarter	27.67		35.44		0.262
2022
2023								2023
First Quarter	First Quarter	$	31.19	$	35.91	$	0.262	First Quarter	$	23.57	$	33.49	$	0.262
Second Quarter	Second Quarter	29.61		32.79		0.262		Second Quarter	17.12		24.19		0.262
Third Quarter	Third Quarter	28.68		34.91		0.262		Third Quarter	16.38		21.60		0.262
Fourth Quarter (dividend payable December 15, 2022)		TBD		TBD		0.270
Fourth Quarter (dividend payable December 15, 2023)								Fourth Quarter (dividend payable December 15, 2023)	TBD		TBD		0.270


		Quarter Ended September 30							Quarter Ended September 30
		2022			2021				2023			2022
Cash Dividends Per Share	Cash Dividends Per Share	$	0.262		$	0.245		Cash Dividends Per Share	$	0.262		$	0.255
Diluted Earnings Per Share	Diluted Earnings Per Share	0.74			0.78			Diluted Earnings Per Share	0.46			0.72
Dividend Payout Ratio	Dividend Payout Ratio	35.41		%	31.41		%	Dividend Payout Ratio	56.96		%	35.42		%
Total Equity (in thousands)	Total Equity (in thousands)	345,550			$	360,171		Total Equity (in thousands)	360,014			$	345,550
Shares Issued and Outstanding (in thousands)	Shares Issued and Outstanding (in thousands)	16,523			16,500			Shares Issued and Outstanding (in thousands)	17,049			17,019
Book Value Per Share	Book Value Per Share	$	20.91		$	21.83		Book Value Per Share	$	21.12		$	20.30
Intangible Assets (in thousands)	Intangible Assets (in thousands)	23,477			23,879			Intangible Assets (in thousands)	23,078			23,477
Tangible Book Value Per Share	Tangible Book Value Per Share	$	19.49		$	20.38		Tangible Book Value Per Share	$	19.76		$	18.92

LIQUIDITY

The objective of effective liquidity management is to ensure that Arrow has the ability to raise cash when needed at a reasonable cost. This includes the capability of meeting expected and unexpected obligations to Arrow's customers at any time. Given the uncertain nature of customer demands and the need to maximize earnings, Arrow must have available reasonably priced sources of funds, both on- and off-balance sheet, that can be accessed quickly in times of need. Arrow’s liquidity position ~~provides~~should provide the Company with the necessary flexibility to address any unexpected near-term disruptions such as reduced cash flows from the investment and loan portfolio, unexpected deposit runoff, or increased loan originations.

Arrow's primary sources of available liquidity are overnight investments in federal funds sold, ~~interest bearing~~interest-bearing bank balances at the Federal Reserve Bank of New York, and cash flow from investment securities and loans. Certain investment securities are categorized as available-for-sale at time of purchase based on their marketability and collateral value, as well as their yield and maturity. The securities available-for-sale portfolio was ~~$575.1~~$519.2 million at September 30, ~~2022, an increase~~2023, a decrease of ~~$15.7~~$54.3 million, from the year-end ~~2021~~2022 level. Due to the potential for volatility in market values, Arrow may not always be able to sell securities on short notice at their carrying value, even to provide needed liquidity. Arrow also held interest-bearing cash balances at September 30, ~~2022~~2023 of ~~$328.6~~$255.0 million compared to ~~$430.7~~$32.8 million at December 31, ~~2021.~~2022.

In addition to liquidity from cash, short-term investments, investment securities and loans, Arrow has supplemented available operating liquidity with additional off-balance sheet sources such as a federal funds lines of credit with correspondent banks and credit lines with the FHLBNY. The federal funds lines of credit are with two correspondent banks totaling $52 million which were not drawn on during the ~~three~~six months ended September 30, ~~2022.~~2023.

To support the borrowing relationship with the FHLBNY, Arrow has pledged collateral, including residential mortgage, home equity and commercial real estate loans. At September 30, ~~2022,~~2023, Arrow had outstanding collateralized obligations with the FHLBNY of ~~$25~~$158.3 million; as of that date, the unused borrowing capacity at the FHLBNY was approximately ~~$775~~$449 million. Brokered deposits have also been identified as an available source of funding accessible in a relatively short time period. At September 30, ~~2022,~~2023, there were no outstanding brokered deposits. Also, Arrow's two bank subsidiaries have each established a borrowing facility with the Federal Reserve Bank of New York, pledging certain consumer loans as collateral for potential "discount window" advances, which are maintained for contingency liquidity purposes. At September 30, ~~2022,~~2023, the amount available under this facility was approximately ~~$651~~$722 million in the aggregate, and there were no advances then outstanding.

Arrow performs regular liquidity stress tests and maintains a contingent liquidity plan to ensure that an adequate amount of available funds can be generated to meet a wide variety of potential liquidity events.

Arrow measures and monitors basic liquidity as a ratio of liquid assets to total short-term liabilities, both with and without the availability of borrowing arrangements. Based on the level of overnight funds investments, available liquidity from the investment securities portfolio, cash flows from the loan portfolio, the stable core deposit base and the significant borrowing capacity, Arrow believes that the available liquidity is sufficient to meet all reasonably likely events or occurrences. At September 30, ~~2022,~~2023, Arrow's

basic liquidity ratio, including FHLBNY collateralized borrowing capacity, was ~~26.5%~~16.7% of total assets, or ~~$952~~$542 million in excess of Arrow's internally-set minimum target ratio of 4%.

Arrow did not experience any significant liquidity constraints in the ~~three~~nine month period ended September 30, ~~2022~~2023 and did not experience any such constraints in recent prior years. Arrow has not at any time during such period been forced to pay above-market rates to obtain retail deposits or other funds from any source.

RECENTLY ISSUED ACCOUNTING STANDARDS

The following accounting standards have been issued and become effective for ~~the Company~~Arrow at a future date:

In March 2020, the FASB issued ASU 2020-04, ~~Reference~~"Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." On January 7, 2021, the FASB issued ASU 2021-01, which refines the scope of ASC 848 and clarifies some of its guidance. The ASU and related amendments provide temporary optional expedients and exceptions to the existing guidance for applying GAAP to affected contract modifications and hedge accounting relationships in the transition away from the LIBOR or other interbank offered rate on financial reporting. The guidance also allows a one-time election to sell and/or reclassify to AFS or trading HTM debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective March 12, 2020 through December 31, 2022 and permit relief solely for reference rate reform actions and different elections over the effective date for legacy and new activity. ~~Arrow is evaluating~~In December 2022, FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848)" which deferred the ~~impact~~sunset date of ~~adopting~~Topic 848 to December 31, 2024, to allow for a transition period after the ~~new guidance on the consolidated financial statements and~~sunset of LIBOR. Arrow does not expect itASU 2022-06 will have a material impact on the consolidated financial statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. For Arrow, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022. Arrow does not expect it will have a material impact on the consolidated financial statements.

6773

RESULTS OF OPERATIONS

Three Months Ended September 30, ~~2022~~2023 Compared With

Three Months Ended September 30, ~~2021~~2022

Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)


		Three Months Ended												Three Months Ended
		September 30, 2022			September 30, 2021			Change			% Change			September 30, 2023			September 30, 2022			Change			% Change
Net Income	Net Income	$	12,163		$	12,989		$	(826)		(6.4)	%	Net Income	$	7,743		$	12,163		$	(4,420)		(36.3)	%
Diluted Earnings Per Share	Diluted Earnings Per Share	0.74			0.78			(0.04)			(5.1)	%	Diluted Earnings Per Share	0.46			0.72			(0.26)			(36.1)	%
Return on Average Assets	Return on Average Assets	1.19		%	1.32		%	(0.13)		%	(9.8)	%	Return on Average Assets	0.75		%	1.19		%	(0.44)		%	(37.0)	%
Return on Average Equity	Return on Average Equity	13.34		%	14.34		%	(1.00)		%	(7.0)	%	Return on Average Equity	8.47		%	13.34		%	(4.87)		%	(36.5)	%

Net income was ~~$12.2~~$7.7 million and diluted ~~earnings per share (EPS)~~EPS of ~~$0.74~~$0.46 for the third quarter of ~~2022,~~2023, compared to net income of ~~$13.0~~$12.2 million and diluted EPS of ~~$0.78~~$0.72 for the third quarter of ~~2021.~~2022. Return on average assets for the third quarter of ~~2022~~2023 was ~~1.19%~~0.75%, a decrease from ~~1.32%~~1.19% in the third quarter of ~~2021.~~2022. In addition, return on average equity decreased to ~~13.34%~~8.47% for the third quarter of ~~2022,~~2023, from ~~14.34%~~13.34% in the third quarter of ~~2021.~~2022.

The following narrative discusses the quarter-to-quarter changes in net interest income, ~~noninterest~~non-interest income, ~~noninterest~~non-interest expense and income taxes:

Net Interest Income

Summary of Net Interest Income

(Dollars in Thousands)


		Three Months Ended												Three Months Ended
		September 30, 2022			September 30, 2021			Change			% Change			September 30, 2023			September 30, 2022			Change			% Change
Interest and Dividend Income	Interest and Dividend Income	$	34,207		$	29,807		$	4,400		14.8	%	Interest and Dividend Income	$	42,117		$	34,207		$	7,910		23.1	%

Interest Expense	Interest Expense	3,306			1,169			2,137			182.8	%	Interest Expense	16,764			3,306			13,458			407.1	%
Net Interest Income	Net Interest Income	30,901			28,638			2,263			7.9	%	Net Interest Income	25,353			30,901			(5,548)			(18.0)	%

Average Earning Assets(1)	Average Earning Assets(1)	3,902,119			3,734,206			167,913			4.5	%	Average Earning Assets(1)	3,973,747			3,902,119			71,628			1.8	%
Average Interest-Bearing Liabilities	Average Interest-Bearing Liabilities	2,781,985			2,705,283			76,702			2.8	%	Average Interest-Bearing Liabilities	2,920,518			2,781,985			138,533			5.0	%

Yield on Earning Assets(1)	Yield on Earning Assets(1)	3.48		%	3.17		%	0.31		%	9.8	%	Yield on Earning Assets(1)	4.20		%	3.48		%	0.72		%	20.7	%

Cost of Interest-Bearing Liabilities	Cost of Interest-Bearing Liabilities	0.47			0.17			0.30			176.5	%	Cost of Interest-Bearing Liabilities	2.28			0.47			1.81			385.1	%

Net Interest Spread	Net Interest Spread	3.01			3.00			0.01			0.3	%	Net Interest Spread	1.92			3.01			(1.09)			(36.2)	%

Net Interest Margin	Net Interest Margin	3.14			3.04			0.10			3.3	%	Net Interest Margin	2.53			3.14			(0.61)			(19.4)	%

Income Earned on PPP Loans included Net Interest Income	Income Earned on PPP Loans included Net Interest Income	$	70		$	2,530		$	(2,460)		(97.2)	%	Income Earned on PPP Loans included Net Interest Income	$	—		$	70		$	(70)		(100.0)	%
Net Interest Income excluding PPP loans	Net Interest Income excluding PPP loans	30,831			26,108			4,723			18.1	%	Net Interest Income excluding PPP loans	25,353			30,831			(5,478)			(17.8)	%
Net Interest Margin excluding PPP loans	Net Interest Margin excluding PPP loans	3.14		%	2.84		%	0.30		%	10.6	%	Net Interest Margin excluding PPP loans	2.53		%	3.14		%	(0.61)		%	(19.4)	%

(1) Includes Nonaccrual Loans.	(1) Includes Nonaccrual Loans.												(1) Includes Nonaccrual Loans.

Net interest income for the recently completed quarter ~~increased~~decreased by ~~$2.3~~$5.5 million, or ~~7.9%~~18.0%, from the third quarter of ~~2021, due to a variety~~2022. Interest and fees on loans were $36.7 million for the third quarter of ~~factors including loan growth offset by the forgiveness of PPP loans and~~2023, an increase ~~in interest expense. Income earned on PPP loans decreased $2.5~~from $29.6 million ~~or 97.2%, from~~for the quarter ending September 30, ~~2021. Cost of interest-bearing liabilities increased as the result of the raising rate environment~~2022, primarily due to loan growth and repricing of municipal deposits. Interest and fees on loans generated $29.6 million in income for the third quarter of 2022 as compared to $27.2 million from the quarter ending September 30, 2021. In the third quarter of 2022, a $536 thousand amortization adjustment of indirecthigher loan ~~fees was recognized as part of loan income.~~rates. Interest expense for the third quarter of ~~2022~~2023 was ~~$3.3~~$16.8 million, an increase of ~~$2.1~~$13.5 million ~~or 182.8% from the $1.2 million in expense for~~versus the comparable quarter ending September 30, ~~2021.~~2022, primarily due to higher deposit rates and changes in deposit composition. Net interest margin ~~increased 10~~decreased 61 basis points in the third quarter of ~~2022~~2023 to ~~3.14%~~2.53%, from ~~3.04%~~3.14% during the third quarter of ~~2021. Excluding PPP loans, net interest margin increased 30 basis points in the third quarter of 2022 to 3.14%, from 2.84% during the third quarter of 2021.~~2022. Average earning asset yields were 3172 basis points higher as compared to the third quarter of ~~2021.~~2022. The cost of interest-bearing liabilities increased 30181 basis points from the quarter ended September 30, ~~2021.~~2022. Arrow defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis" on page 5156 and 57 The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" on page 6066 and "Loan Trends" on page ~~62.~~64.

As discussed previously under the heading "Asset Quality" beginning on page ~~62,~~68, the provision for loan losses for the third quarter of ~~2022~~2023 was ~~$1.7 million,~~$354 thousand, compared to a provision of ~~$99 thousand~~$1.7 million for the third quarter of ~~2021.~~2022.

6874

~~Noninterest~~Non-interest Income

Summary of ~~Noninterest~~Non-interest Income

(Dollars in Thousands)


		Three Months Ended									Three Months Ended
		September 30, 2022		September 30, 2021		Change		% Change			September 30, 2023		September 30, 2022		Change		% Change
Income From Fiduciary Activities	Income From Fiduciary Activities	$	2,341	$	2,571	$	(230)	(8.9)	%	Income From Fiduciary Activities	$	2,378	$	2,341	$	37	1.6	%
Fees for Other Services to Customers	Fees for Other Services to Customers	3,071		2,966		105		3.5	%	Fees for Other Services to Customers	2,761		3,071		(310)		(10.1)	%
Insurance Commissions	Insurance Commissions	1,650		1,576		74		4.7	%	Insurance Commissions	1,695		1,650		45		2.7	%

Net Gain (Loss) on Securities		95		(106)		201		189.6	%
Net Gain on Securities										Net Gain on Securities	71		95		(24)		(25.3)	%
Net Gain on the Sale of Loans	Net Gain on the Sale of Loans	18		211		(193)		(91.5)	%	Net Gain on the Sale of Loans	21		18		3		16.7	%
Other Operating Income	Other Operating Income	652		476		176		37.0	%	Other Operating Income	1,124		652		472		72.4	%
Total Noninterest Income		$	7,827	$	7,694	$	133	1.7	%
Total Non-interest Income										Total Non-interest Income	$	8,050	$	7,827	$	223	2.8	%

Total ~~noninterest~~non-interest income in the current quarter was ~~$7.8~~$8.1 million, ~~a decrease~~an increase of ~~$133 thousand~~$0.2 million from the comparable quarter of ~~2021.~~2022. Income from fiduciary activities for the third quarter of ~~2022 decreased~~2023 increased by ~~8.9%~~1.6% from the third quarter of ~~2021, primarily driven by market conditions.~~2022. Assets under trust administration and investment management at September 30, ~~2022~~2023 were $1.63 billion, an increase from $1.52 ~~billion.~~billion at September 30, 2022.

Fees for other services to customers were ~~$3.1~~$2.8 million for the third quarter of ~~2022, an increase~~2023, a decrease of ~~$105~~$310 thousand or ~~3.5%~~10.1% from the third quarter of ~~2021.~~2022.

Insurance commissions were $1.7 million for the third quarter of ~~2022, an increase of $74 thousand from~~2023, essentially flat as compared to the third quarter of ~~2021.~~2022.

Net gain on securities of ~~$95~~$71 thousand for the third quarter of ~~2022~~2023 was the result of an increase in the fair value of equity securities from June 30, ~~2022. Net gain on the sale of loans in the third quarter of 2022 decreased by $193 thousand from the third quarter of 2021 on fewer loan sales. See page 54 for the discussion of loan sales.~~

2023. Other operating income increased ~~$176 thousand~~ from the comparable prior-year quarter ~~in 2021, primarily related to~~as the result of bank-owned life insurance proceeds.

Non-interest Expense

Summary of Non-interest Expense

(Dollars in Thousands)


	Three Months Ended
	September 30, 2023			September 30, 2022			Change			% Change
Salaries and Employee Benefits	$	11,988		$	12,427		$	(439)		(3.5)	%
Occupancy Expense of Premises, Net	1,517			1,521			(4)			(0.3)	%
Technology and Equipment Expense	4,371			4,049			322			8.0	%
FDIC and FICO Assessments	515			295			220			74.6	%
Amortization	43			48			(5)			(10.4)	%
Other Operating Expense	5,045			3,108			1,937			62.3	%
Total Non-interest Expense	$	23,479		$	21,448		$	2,031		9.5	%
Efficiency Ratio	69.93		%	55.01		%	14.9		%	27.1	%

Non-interest expense for the third quarter of 2023 was $23.5 million, an increase of $2.0 million, or 9.5%, from the third quarter of 2022. Salaries and benefit expenses decreased $439 thousand, or 3.5%, from the comparable quarter in 2022. Technology expenses in the third quarter increased $322 thousand, or 8.0%, from the third quarter of 2022. In the third quarter of 2023, other operating expenses increased $1.9 million, driven primarily by the legal and professional fees associated with the delay in the filing the 2022 Form 10-K and the 2023 First Quarter Form 10-Q.

Income Taxes

Summary of Income Taxes

(Dollars in Thousands)


	Three Months Ended
	September 30, 2023			September 30, 2022			Change			% Change
Provision for Income Taxes	$	1,827		$	3,402		$	(1,575)		(46.3)	%
Effective Tax Rate	19.1		%	21.9		%	(2.8)		%	(12.8)	%

The decrease in the effective tax rate for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to the reduction of pretax income.

RESULTS OF OPERATIONS

Nine Months Ended September 30, 2023 Compared With

Nine Months Ended September 30, 2022

Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)


	Nine Months Ended
	September 30, 2023			September 30, 2022			Change			% Change
Net Income	$	22,352		$	36,712		$	(14,360)		(39.1)	%
Diluted Earnings Per Share	1.31			2.15			(0.84)			(39.1)
Return on Average Assets	0.74		%	1.22		%	(0.48)		%	(39.3)
Return on Average Equity	8.25		%	13.52		%	(5.27)		%	(39.0)

Net income was $22.4 million and diluted EPS was $1.31 for the first nine months of 2023, compared to net income of $36.7 million and diluted EPS of $2.15 for the first nine months of 2022. ROA for the first nine months of 2023 was 0.74%, a decrease from 1.22% for the first nine months of 2022. In addition, ROE decreased to 8.25% for the first nine months of 2023 from 13.52% for the first nine months of 2022.

The following narrative discusses the period-to-period changes in net interest income, non-interest income, non-interest expense and income taxes:

Net Interest Income

Summary of Net Interest Income

(Dollars in Thousands)


	Nine Months Ended
	September 30, 2023			September 30, 2022			Change			% Change
Interest and Dividend Income	$	118,240		$	93,747		$	24,493		26.1	%



Interest Expense	39,021			5,983			33,038			552.2	%
Net Interest Income	79,219			87,764			(8,545)			(9.7)	%

Average Earning Assets (1)	3,924,875			3,888,992			35,883			0.9	%
Average Interest-Bearing Liabilities	2,876,360			2,815,115			61,245			2.2	%

Yield on Earning Assets (1)	4.03		%	3.22		%	0.81		%	25.2	%

Cost of Interest-Bearing Liabilities	1.81			0.28			1.53			546.4	%

Net Interest Spread	2.22			2.94			(0.72)			(24.5)	%


Net Interest Margin	2.70			3.02			(0.32)			(10.6)	%

Income Earned on PPP Loans included Net Interest Income	$	—		$	1,574		$	(1,574)		(100.0)	%
Net Interest Income excluding PPP loans	79,219			86,190			(6,971)			(8.1)	%
Net Interest Margin excluding PPP loans	2.70		%	2.97		%	(0.27)		%	(9.1)	%

(1) Includes Nonaccrual Loans.

Net interest income for the first nine months of 2023 decreased $8.5 million, or 9.7%, as compared to the first nine months of 2022. Total loans at September 30, 2023 increased $213.8 million from September 30, 2022. Investments decreased $97.2 million from September 30, 2022. At September 30, 2023, deposit balances were $3.7 billion. The decline of deposits from September 30, 2022 to September 30, 2023 was $128.6 million, or 3.4%. Net interest margin for the first nine months of 2023 decreased 32 basis points to 2.70%, from 3.02% for the first nine months of 2022. Average earning asset yields were 81 basis points higher as compared to the first nine months of 2022, primarily due to higher market rates. The cost of interest-bearing liabilities increased 153 basis points from the first nine months of 2022. Arrow defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis." The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" on page 66 and "Loan Trends" on page 64.

As discussed previously under the heading "Asset Quality" beginning on page 68, the provision for loan losses for the first nine months of 2023 was $2.9 million, compared to $3.4 million for the first nine months of 2022.

Non-interest Income

Summary of Non-interest Income

(Dollars in Thousands)


	Nine Months Ended
	September 30, 2023		September 30, 2022		Change		% Change
Income From Fiduciary Activities	7,081		7,454		$	(373)	(5.0)	%
Fees for Other Services to Customers	8,073		8,916		(843)		(9.5)
Insurance Commissions	4,775		4,783		(8)		(0.2)

Net (Loss) Gain on Securities	(214)		379		(593)		(156.5)
Net Gain on the Sale of Loans	25		80		(55)		(68.8)
Other Operating Income	1,893		2,121		(228)		(10.7)
Total Non-interest Income	$	21,633	$	23,733	$	(2,100)	(8.8)	%

Total non-interest income for the first nine months of 2023 was $21.6 million, a decrease of $2.1 million from the first nine months of 2022. Income from fiduciary activities for the first nine months of 2023 decreased by 5.0% from the first nine months of 2022, primarily due to market performance. For the first nine months of 2023, Arrow has been able to maintain a stable customer base.

Fees for other services to customers were $8.1 million for the first nine months of 2023 representing a decrease of $0.8 million, or 9.5%, from the prior year comparative period.

Insurance commissions were $4.8 million for the first nine months of 2023, which was relatively unchanged from the prior year comparable period.

Net loss on security transactions of $214 thousand for the first nine months of 2023 was the result of the decrease in the fair value of equity securities.

Other operating income decreased $228 thousand from the comparable period in 2022, due to gains on other assets received in 2022.

~~Noninterest~~Net Interest Income

Summary of Net Interest Income

(Dollars in Thousands)


	Three Months Ended
	September 30, 2023			September 30, 2022			Change			% Change
Interest and Dividend Income	$	42,117		$	34,207		$	7,910		23.1	%



Interest Expense	16,764			3,306			13,458			407.1	%
Net Interest Income	25,353			30,901			(5,548)			(18.0)	%

Average Earning Assets(1)	3,973,747			3,902,119			71,628			1.8	%
Average Interest-Bearing Liabilities	2,920,518			2,781,985			138,533			5.0	%

Yield on Earning Assets(1)	4.20		%	3.48		%	0.72		%	20.7	%

Cost of Interest-Bearing Liabilities	2.28			0.47			1.81			385.1	%

Net Interest Spread	1.92			3.01			(1.09)			(36.2)	%


Net Interest Margin	2.53			3.14			(0.61)			(19.4)	%

Income Earned on PPP Loans included Net Interest Income	$	—		$	70		$	(70)		(100.0)	%
Net Interest Income excluding PPP loans	25,353			30,831			(5,478)			(17.8)	%
Net Interest Margin excluding PPP loans	2.53		%	3.14		%	(0.61)		%	(19.4)	%

(1) Includes Nonaccrual Loans.

Net interest income for the recently completed quarter decreased by $5.5 million, or 18.0%, from the third quarter of 2022. Interest and fees on loans were $36.7 million for the third quarter of 2023, an increase from $29.6 million for the quarter ending September 30, 2022, primarily due to loan growth and higher loan rates. Interest expense for the third quarter of 2023 was $16.8 million, an increase of $13.5 million versus the comparable quarter ending September 30, 2022, primarily due to higher deposit rates and changes in deposit composition. Net interest margin decreased 61 basis points in the third quarter of 2023 to 2.53%, from 3.14% during the third quarter of 2022. Average earning asset yields were 72 basis points higher as compared to the third quarter of 2022. The cost of interest-bearing liabilities increased 181 basis points from the quarter ended September 30, 2022. Arrow defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis" on page 56 and 57 The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" on page 66 and "Loan Trends" on page 64.

As discussed previously under the heading "Asset Quality" beginning on page 68, the provision for loan losses for the third quarter of 2023 was $354 thousand, compared to a provision of $1.7 million for the third quarter of 2022.

Non-interest Income

Summary of Non-interest Income

(Dollars in Thousands)


	Three Months Ended
	September 30, 2023		September 30, 2022		Change		% Change
Income From Fiduciary Activities	$	2,378	$	2,341	$	37	1.6	%
Fees for Other Services to Customers	2,761		3,071		(310)		(10.1)	%
Insurance Commissions	1,695		1,650		45		2.7	%

Net Gain on Securities	71		95		(24)		(25.3)	%
Net Gain on the Sale of Loans	21		18		3		16.7	%
Other Operating Income	1,124		652		472		72.4	%
Total Non-interest Income	$	8,050	$	7,827	$	223	2.8	%

Total non-interest income in the current quarter was $8.1 million, an increase of $0.2 million from the comparable quarter of 2022. Income from fiduciary activities for the third quarter of 2023 increased by 1.6% from the third quarter of 2022. Assets under trust administration and investment management at September 30, 2023 were $1.63 billion, an increase from $1.52 billion at September 30, 2022.

Fees for other services to customers were $2.8 million for the third quarter of 2023, a decrease of $310 thousand or 10.1% from the third quarter of 2022.

Insurance commissions were $1.7 million for the third quarter of 2023, essentially flat as compared to the third quarter of 2022.

Net gain on securities of $71 thousand for the third quarter of 2023 was the result of an increase in the fair value of equity securities from June 30, 2023. Other operating income increased from the comparable prior-year quarter as the result of bank-owned life insurance proceeds.

Non-interest Expense

Summary of ~~Noninterest~~Non-interest Expense

(Dollars in Thousands)


		Three Months Ended												Three Months Ended
		September 30, 2022			September 30, 2021			Change			% Change			September 30, 2023			September 30, 2022			Change			% Change
Salaries and Employee Benefits	Salaries and Employee Benefits	$	12,427		$	11,377		$	1,050		9.2	%	Salaries and Employee Benefits	$	11,988		$	12,427		$	(439)		(3.5)	%
Occupancy Expense of Premises, Net	Occupancy Expense of Premises, Net	1,521			1,403			118			8.4	%	Occupancy Expense of Premises, Net	1,517			1,521			(4)			(0.3)	%
Technology and Equipment Expense	Technology and Equipment Expense	4,049			3,833			216			5.6	%	Technology and Equipment Expense	4,371			4,049			322			8.0	%
FDIC and FICO Assessments	FDIC and FICO Assessments	295			249			46			18.5	%	FDIC and FICO Assessments	515			295			220			74.6	%
Amortization	Amortization	48			52			(4)			(7.7)	%	Amortization	43			48			(5)			(10.4)	%
Other Operating Expense	Other Operating Expense	3,108			2,509			599			23.9	%	Other Operating Expense	5,045			3,108			1,937			62.3	%
Total Noninterest Expense		$	21,448		$	19,423		$	2,025		10.4	%
Total Non-interest Expense													Total Non-interest Expense	$	23,479		$	21,448		$	2,031		9.5	%
Efficiency Ratio	Efficiency Ratio	55.01		%	52.74		%	2.3		%	4.4	%	Efficiency Ratio	69.93		%	55.01		%	14.9		%	27.1	%

~~Noninterest~~Non-interest expense for the third quarter of ~~2022~~2023 was ~~$21.4~~$23.5 million, an increase of $2.0 million, or ~~10.4%~~9.5%, from the third quarter of ~~2021.~~2022. Salaries and benefit expenses ~~increased $1.1 million,~~decreased $439 thousand, or ~~9.2%~~3.5%, from the comparable quarter in 2021. In the third quarter of 2022, additional actuarial pension expense of $550 thousand was recognized within salaries and employee benefits as a result of exceeding the threshold amount of lump sum distributions during the year. Arrow awarded a special bonus in the third quarter of 2022, similar to special pandemic bonuses awarded in 2021 and 2020.2022. Technology expenses in the third quarter of increased ~~$216~~$322 thousand, or ~~5.6%~~8.0%, from the third quarter of ~~2021. Other~~2022. In the third quarter of 2023, other operating ~~expense includes an expense for estimated credit losses on off-balance sheet exposures of $30 thousand~~expenses increased $1.9 million, driven primarily by the legal and professional fees associated with the delay in the ~~second quarter of~~filing the 2022 .Form 10-K and the 2023 First Quarter Form 10-Q.

Income Taxes

Summary of Income Taxes

(Dollars in Thousands)


		Three Months Ended												Three Months Ended
		September 30, 2022			September 30, 2021			Change			% Change			September 30, 2023			September 30, 2022			Change			% Change
Provision for Income Taxes	Provision for Income Taxes	$	3,402		$	3,821		$	(419)		(11.0)	%	Provision for Income Taxes	$	1,827		$	3,402		$	(1,575)		(46.3)	%
Effective Tax Rate	Effective Tax Rate	21.9		%	22.7		%	(0.8)		%	(3.5)	%	Effective Tax Rate	19.1		%	21.9		%	(2.8)		%	(12.8)	%

The decrease in the effective tax rate for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to the reduction of pretax income.

RESULTS OF OPERATIONS

Nine Months Ended September 30, ~~2022~~2023 Compared With

Nine Months Ended September 30, ~~2021~~2022

Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)


		Nine Months Ended												Nine Months Ended
		September 30, 2022			September 30, 2021			Change			% Change			September 30, 2023			September 30, 2022			Change			% Change
Net Income	Net Income	$	36,712		$	39,548		$	(2,836)		(7.2)	%	Net Income	$	22,352		$	36,712		$	(14,360)		(39.1)	%
Diluted Earnings Per Share	Diluted Earnings Per Share	2.22			2.39			(0.17)			(7.1)		Diluted Earnings Per Share	1.31			2.15			(0.84)			(39.1)
Return on Average Assets	Return on Average Assets	1.22		%	1.38		%	(0.16)		%	(11.6)		Return on Average Assets	0.74		%	1.22		%	(0.48)		%	(39.3)
Return on Average Equity	Return on Average Equity	13.52		%	15.10		%	(1.58)		%	(10.5)		Return on Average Equity	8.25		%	13.52		%	(5.27)		%	(39.0)

Net income was ~~$36.7~~$22.4 million and diluted ~~earnings per share (EPS) of $2.22~~EPS was $1.31 for the first nine months of ~~2022,~~2023, compared to net income of ~~$39.5~~$36.7 million and diluted EPS of ~~$2.39~~$2.15 for the first nine months of ~~2021. Return on average assets~~2022. ROA for the first nine months of ~~2022~~2023 was ~~1.22%~~0.74%, a decrease from ~~1.38%~~1.22% for the first nine months of ~~2021.~~2022. In addition, ~~return on average equity~~ROE decreased to 8.25% for the first nine months of 2023 from 13.52% for the first nine months of ~~2022 from 15.10% for the first nine months of 2021.~~2022.

The following narrative discusses the period-to-period changes in net interest income, ~~noninterest~~non-interest income, ~~noninterest~~non-interest expense and income taxes:

Net Interest Income

Summary of Net Interest Income

(Dollars in Thousands)


	Nine Months Ended
	September 30, 2023			September 30, 2022			Change			% Change
Interest and Dividend Income	$	118,240		$	93,747		$	24,493		26.1	%



Interest Expense	39,021			5,983			33,038			552.2	%
Net Interest Income	79,219			87,764			(8,545)			(9.7)	%

Average Earning Assets (1)	3,924,875			3,888,992			35,883			0.9	%
Average Interest-Bearing Liabilities	2,876,360			2,815,115			61,245			2.2	%

Yield on Earning Assets (1)	4.03		%	3.22		%	0.81		%	25.2	%

Cost of Interest-Bearing Liabilities	1.81			0.28			1.53			546.4	%

Net Interest Spread	2.22			2.94			(0.72)			(24.5)	%


Net Interest Margin	2.70			3.02			(0.32)			(10.6)	%

Income Earned on PPP Loans included Net Interest Income	$	—		$	1,574		$	(1,574)		(100.0)	%
Net Interest Income excluding PPP loans	79,219			86,190			(6,971)			(8.1)	%
Net Interest Margin excluding PPP loans	2.70		%	2.97		%	(0.27)		%	(9.1)	%

(1) Includes Nonaccrual Loans.

Non-interest Income

Summary of Non-interest Income

(Dollars in Thousands)


	Nine Months Ended
	September 30, 2023		September 30, 2022		Change		% Change
Income From Fiduciary Activities	7,081		7,454		$	(373)	(5.0)	%
Fees for Other Services to Customers	8,073		8,916		(843)		(9.5)
Insurance Commissions	4,775		4,783		(8)		(0.2)

Net (Loss) Gain on Securities	(214)		379		(593)		(156.5)
Net Gain on the Sale of Loans	25		80		(55)		(68.8)
Other Operating Income	1,893		2,121		(228)		(10.7)
Total Non-interest Income	$	21,633	$	23,733	$	(2,100)	(8.8)	%

Fees for other services to customers were $8.1 million for the first nine months of 2023 representing a decrease of $0.8 million, or 9.5%, from the prior year comparative period.

Insurance commissions were $4.8 million for the first nine months of 2023, which was relatively unchanged from the prior year comparable period.

Net loss on security transactions of $214 thousand for the first nine months of 2023 was the result of the decrease in the fair value of equity securities.

Other operating income decreased $228 thousand from the comparable period in 2022, due to gains on other assets received in 2022.

Net Interest Income

Summary of Net Interest Income

(Dollars in Thousands)


		Nine Months Ended												Three Months Ended
		September 30, 2022			September 30, 2021			Change			% Change			September 30, 2023			September 30, 2022			Change			% Change
Interest and Dividend Income	Interest and Dividend Income	$	93,747		$	87,196		$	6,551		7.5	%	Interest and Dividend Income	$	42,117		$	34,207		$	7,910		23.1	%

Interest Expense	Interest Expense	5,983			4,043			1,940			48.0	%	Interest Expense	16,764			3,306			13,458			407.1	%
Net Interest Income	Net Interest Income	87,764			83,153			4,611			5.5	%	Net Interest Income	25,353			30,901			(5,548)			(18.0)	%

Average Earning Assets (1)	Average Earning Assets (1)	3,888,992			3,657,060			231,932			6.3	%	Average Earning Assets(1)	3,973,747			3,902,119			71,628			1.8	%
Average Interest-Bearing Liabilities	Average Interest-Bearing Liabilities	2,815,115			2,689,070			126,045			4.7	%	Average Interest-Bearing Liabilities	2,920,518			2,781,985			138,533			5.0	%

Yield on Earning Assets (1)	Yield on Earning Assets (1)	3.22		%	3.19		%	0.03		%	0.9	%	Yield on Earning Assets(1)	4.20		%	3.48		%	0.72		%	20.7	%

Cost of Interest-Bearing Liabilities	Cost of Interest-Bearing Liabilities	0.28			0.20			0.08			40.0	%	Cost of Interest-Bearing Liabilities	2.28			0.47			1.81			385.1	%

Net Interest Spread	Net Interest Spread	2.94			2.99			(0.05)			(1.7)	%	Net Interest Spread	1.92			3.01			(1.09)			(36.2)	%

Net Interest Margin	Net Interest Margin	3.02			3.04			(0.02)			(0.7)	%	Net Interest Margin	2.53			3.14			(0.61)			(19.4)	%

Income Earned on PPP Loans included Net Interest Income	Income Earned on PPP Loans included Net Interest Income	$	1,574		$	6,957		$	(5,383)		(77.4)	%	Income Earned on PPP Loans included Net Interest Income	$	—		$	70		$	(70)		(100.0)	%
Net Interest Income excluding PPP loans	Net Interest Income excluding PPP loans	86,190			76,196			9,994			13.1	%	Net Interest Income excluding PPP loans	25,353			30,831			(5,478)			(17.8)	%
Net Interest Margin excluding PPP loans	Net Interest Margin excluding PPP loans	2.97		%	2.88		%	0.09		%	3.1	%	Net Interest Margin excluding PPP loans	2.53		%	3.14		%	(0.61)		%	(19.4)	%

(1) Includes Nonaccrual Loans.	(1) Includes Nonaccrual Loans.												(1) Includes Nonaccrual Loans.

Non-interest Income

Summary of Non-interest Income

(Dollars in Thousands)


	Three Months Ended
	September 30, 2023		September 30, 2022		Change		% Change
Income From Fiduciary Activities	$	2,378	$	2,341	$	37	1.6	%
Fees for Other Services to Customers	2,761		3,071		(310)		(10.1)	%
Insurance Commissions	1,695		1,650		45		2.7	%

Net Gain on Securities	71		95		(24)		(25.3)	%
Net Gain on the Sale of Loans	21		18		3		16.7	%
Other Operating Income	1,124		652		472		72.4	%
Total Non-interest Income	$	8,050	$	7,827	$	223	2.8	%

Fees for other services to customers were $2.8 million for the third quarter of 2023, a decrease of $310 thousand or 10.1% from the third quarter of 2022.

Insurance commissions were $1.7 million for the third quarter of 2023, essentially flat as compared to the third quarter of 2022.

Non-interest Expense

Summary of Non-interest Expense

(Dollars in Thousands)


	Three Months Ended
	September 30, 2023			September 30, 2022			Change			% Change
Salaries and Employee Benefits	$	11,988		$	12,427		$	(439)		(3.5)	%
Occupancy Expense of Premises, Net	1,517			1,521			(4)			(0.3)	%
Technology and Equipment Expense	4,371			4,049			322			8.0	%
FDIC and FICO Assessments	515			295			220			74.6	%
Amortization	43			48			(5)			(10.4)	%
Other Operating Expense	5,045			3,108			1,937			62.3	%
Total Non-interest Expense	$	23,479		$	21,448		$	2,031		9.5	%
Efficiency Ratio	69.93		%	55.01		%	14.9		%	27.1	%

Income Taxes

Summary of Income Taxes

(Dollars in Thousands)


	Three Months Ended
	September 30, 2023			September 30, 2022			Change			% Change
Provision for Income Taxes	$	1,827		$	3,402		$	(1,575)		(46.3)	%
Effective Tax Rate	19.1		%	21.9		%	(2.8)		%	(12.8)	%

The decrease in the effective tax rate for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily due to the reduction of pretax income.

RESULTS OF OPERATIONS

Nine Months Ended September 30, 2023 Compared With

Nine Months Ended September 30, 2022

Summary of Earnings Performance

(Dollars in Thousands, Except Per Share Amounts)


	Nine Months Ended
	September 30, 2023			September 30, 2022			Change			% Change
Net Income	$	22,352		$	36,712		$	(14,360)		(39.1)	%
Diluted Earnings Per Share	1.31			2.15			(0.84)			(39.1)
Return on Average Assets	0.74		%	1.22		%	(0.48)		%	(39.3)
Return on Average Equity	8.25		%	13.52		%	(5.27)		%	(39.0)

The following narrative discusses the period-to-period changes in net interest income, non-interest income, non-interest expense and income taxes:

Net Interest Income

Summary of Net Interest Income

(Dollars in Thousands)


	Nine Months Ended
	September 30, 2023			September 30, 2022			Change			% Change
Interest and Dividend Income	$	118,240		$	93,747		$	24,493		26.1	%



Interest Expense	39,021			5,983			33,038			552.2	%
Net Interest Income	79,219			87,764			(8,545)			(9.7)	%

Average Earning Assets (1)	3,924,875			3,888,992			35,883			0.9	%
Average Interest-Bearing Liabilities	2,876,360			2,815,115			61,245			2.2	%

Yield on Earning Assets (1)	4.03		%	3.22		%	0.81		%	25.2	%

Cost of Interest-Bearing Liabilities	1.81			0.28			1.53			546.4	%

Net Interest Spread	2.22			2.94			(0.72)			(24.5)	%


Net Interest Margin	2.70			3.02			(0.32)			(10.6)	%

Income Earned on PPP Loans included Net Interest Income	$	—		$	1,574		$	(1,574)		(100.0)	%
Net Interest Income excluding PPP loans	79,219			86,190			(6,971)			(8.1)	%
Net Interest Margin excluding PPP loans	2.70		%	2.97		%	(0.27)		%	(9.1)	%

(1) Includes Nonaccrual Loans.

Net interest income for the first nine months of ~~2022 increased $4.6~~2023 decreased $8.5 million, or ~~5.5%~~9.7%, ~~from~~as compared to the first nine months of 2021. Excluding PPP loans, net interest income for the first nine months of 2022 increased $10.0 million, or 13.1%, from the first nine months of 2021. Net interest margin, excluding PPP loans was 2.97% for the first nine months of 2022, an increase of 9 basis points over the prior year.2022. Total loans at September 30, ~~2022~~2023 increased ~~$270.0~~$213.8 million from September 30, ~~2021.~~2022. Investments ~~increased $72.2~~decreased $97.2 million from September 30, ~~2021.~~2022. At September 30, ~~2022,~~2023, deposit balances ~~reached $3.8~~were $3.7 billion. ~~Deposit growth~~The decline of deposits from September 30, ~~2021~~2022 to September 30, ~~2022~~2023 was ~~$189.5~~$128.6 million, or ~~5.3%~~3.4%. Net interest margin for the first nine months of ~~2022~~2023 decreased 232 basis points to ~~3.02%~~2.70%, from ~~3.04%~~3.02% for the first nine months of ~~2021.~~2022. Average earning asset yields were 381 basis points higher as compared to the first nine months of ~~2021~~2022, primarily due to ~~changes in balance sheet mix, as cash was deployed into loans, combined with~~ higher market ~~rates, offset by the timing of PPP loan forgiveness.~~rates. The cost of interest-bearing liabilities increased 8153 basis points from the first nine months of ~~2021.~~2022. Arrow defines net interest margin as net interest income divided by average earning assets, annualized. Further detailed information is presented above under the section entitled "Average Consolidated Balance Sheets and Net Interest Income Analysis." The impact of recent interest rate changes on Arrow's deposit and loan portfolios are discussed above in this Report under the sections entitled "Deposit Trends" on page 6066 and "Loan Trends" on page ~~62.~~64.

As discussed previously under the heading "Asset Quality" beginning on page ~~62,~~68, the provision for loan losses for the first nine months of ~~2022~~2023 was ~~$3.4~~$2.9 million, compared to ~~a provision of $(286) thousand~~$3.4 million for the first nine months of ~~2021.~~2022.

7076

~~Noninterest~~Non-interest Income

Summary of ~~Noninterest~~Non-interest Income

(Dollars in Thousands)


		Nine Months Ended									Nine Months Ended
		September 30, 2022		September 30, 2021		Change		% Change			September 30, 2023		September 30, 2022		Change		% Change
Income From Fiduciary Activities	Income From Fiduciary Activities	7,454		7,538		$	(84)	(1.1)	%	Income From Fiduciary Activities	7,081		7,454		$	(373)	(5.0)	%
Fees for Other Services to Customers	Fees for Other Services to Customers	8,916		8,494		422		5.0		Fees for Other Services to Customers	8,073		8,916		(843)		(9.5)
Insurance Commissions	Insurance Commissions	4,783		4,842		(59)		(1.2)		Insurance Commissions	4,775		4,783		(8)		(0.2)

Net Gain on Securities		379		250		129		51.6
Net (Loss) Gain on Securities										Net (Loss) Gain on Securities	(214)		379		(593)		(156.5)
Net Gain on the Sale of Loans	Net Gain on the Sale of Loans	80		2,251		(2,171)		(96.4)		Net Gain on the Sale of Loans	25		80		(55)		(68.8)
Other Operating Income	Other Operating Income	2,121		1,405		716		51.0		Other Operating Income	1,893		2,121		(228)		(10.7)
Total Noninterest Income		$	23,733	$	24,780	$	(1,047)	(4.2)	%
Total Non-interest Income										Total Non-interest Income	$	21,633	$	23,733	$	(2,100)	(8.8)	%

Total ~~noninterest~~non-interest income for the first nine months of ~~2022~~2023 was ~~$23.7~~$21.6 million, a decrease of ~~$1.0~~$2.1 million from the first nine months of ~~2021.~~2022. Income from fiduciary activities for the first nine months of ~~2022~~2023 decreased by ~~1.1%~~5.0% from the first nine months of ~~2021,~~2022, primarily due to market performance. For the first nine months of 2023, Arrow has been able to maintain a stable customer base.

Fees for other services to customers were ~~$8.9~~$8.1 million for the first nine months of ~~2022~~2023 representing ~~an increase~~a decrease of ~~$0.4~~$0.8 million, or ~~5.0%~~9.5%, from the prior year comparative period.

Insurance commissions were $4.8 million for the first nine months of ~~2022,~~2023, which was relatively unchanged from the prior year comparable period.

Net ~~gain~~loss on security transactions of ~~$379~~$214 thousand for the first nine months of ~~2022~~2023 was the result of the ~~increase~~decrease in the fair value of equity securities.

Net gain on the sale of loans for the first nine months of 2022 decreased $2.2 million from the comparable period in 2021 as a result of the decision to grow the residential loan portfolio. See page 54 for the discussion of loan sales.

Other operating income ~~increased $716~~decreased $228 thousand from the comparable period in ~~2021,~~2022, due ~~primarily~~ to ~~bank-owned life insurance proceeds and~~ gains on other ~~assets.~~assets received in 2022.

Noninterest Expense

Summary of Noninterest Expense

(Dollars in Thousands)


		Nine Months Ended												Nine Months Ended
		September 30, 2022			September 30, 2021			Change			% Change			September 30, 2023			September 30, 2022			Change			% Change
Salaries and Employee Benefits	Salaries and Employee Benefits	$	35,400		$	33,360		$	2,040		6.1	%	Salaries and Employee Benefits	$	35,974		$	35,400		$	574		1.6	%
Occupancy Expense of Premises, Net	Occupancy Expense of Premises, Net	4,721			4,480			241			5.4		Occupancy Expense of Premises, Net	4,728			4,721			7			0.1
Technology and Equipment Expense	Technology and Equipment Expense	11,802			11,002			800			7.3		Technology and Equipment Expense	13,150			11,802			1,348			11.4
FDIC and FICO Assessments	FDIC and FICO Assessments	893			764			129			16.9		FDIC and FICO Assessments	1,478			893			585			65.5
Amortization	Amortization	309			158			151			95.6		Amortization	132			145			(13)			(9.0)
Other Operating Expense	Other Operating Expense	7,613			7,424			189			2.5		Other Operating Expense	14,396			7,777			6,619			85.1
Total Noninterest Expense	Total Noninterest Expense	$	60,738		$	57,188		$	3,550		6.2		Total Noninterest Expense	$	69,858		$	60,738		$	9,120		15.0
Efficiency Ratio	Efficiency Ratio	54.14		%	52.56		%	1.58		%	3.0	%	Efficiency Ratio	68.60		%	54.14		%	14.46		%	26.7	%

Noninterest expense for the first nine months of ~~2022~~2023 was ~~$60.7~~$69.9 million, an increase of ~~$3.6~~$9.1 million, or ~~6.2%~~15.0%, from the first nine months of ~~2021.~~2022. Salaries and benefit expenses increased ~~$2.0 million,~~$574 thousand, or ~~6.1%~~1.6%, from the comparable period in ~~2021. The increase was partially the result of the inclusion of $550 thousand relating to additional actuarial pension expense.~~2022. Technology expenses increased ~~$800 thousand,~~$1.3 million, or ~~7.3%~~11.4%, from the first nine months of ~~2021.~~2022. Other non-interest expense increased ~~$189 thousand~~$6.6 million for the first nine months of ~~2022,~~2023, as compared to the first nine months of ~~2021. Other non-interest~~2022. The majority of the increase in expense ~~includes a credit for estimated credit losses on off-balance sheet credit exposures~~was related to additional legal and professional fees associated with the delay in the filing of ~~$235 thousand for~~ the ~~first nine months of 2022.~~2022 Form 10-K and First Quarter 2023 Form 10-Q.

Income Taxes

Summary of Income Taxes

(Dollars in Thousands)


		Nine Months Ended												Nine Months Ended
		September 30, 2022			September 30, 2021			Change			% Change			September 30, 2023			September 30, 2022			Change			% Change
Provision for Income Taxes	Provision for Income Taxes	$	10,658		$	11,483		$	(825)		(7.2)	%	Provision for Income Taxes	$	5,786		$	10,658		$	(4,872)		(45.7)	%
Effective Tax Rate	Effective Tax Rate	22.5		%	22.5		%	—		%	—	%	Effective Tax Rate	20.6		%	22.5		%	(1.9)		%	(8.4)	%

The decrease in the effective tax rate for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily due to the reduction of pretax income.

7177

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In addition to credit risk in the loan portfolio and liquidity risk, discussed earlier, Arrow's business activities also generate market risk. Market risk is the possibility that changes in future market rates (interest rates) or prices (market value of financial instruments) will make Arrow's position (i.e., assets and operations) less valuable. Arrow's primary market risk is interest rate volatility. The ongoing monitoring and management of interest rate risk is an important component of the asset/liability management process, which is governed by policies that are reviewed and approved annually by the Board of Directors. The Board of Directors delegates responsibility for carrying out asset/liability oversight and control to management's Asset/Liability Committee (ALCO). In this capacity ALCO develops guidelines and strategies impacting the asset/liability profile based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends.

Changes in market interest rates, whether increases or decreases, can trigger repricing and changes in the pace of payments for both assets and liabilities (prepayment risk). This may individually or in combination affect net interest income, net interest margin, and ultimately net income, either positively or negatively. ALCO utilizes the results of a detailed and dynamic simulation model to quantify this interest rate risk by projecting net interest income in various interest rate scenarios.

Arrow's standard simulation model applies a parallel shift in interest rates, ramped over a 12-month period, to capture the impact of changing interest rates on net interest income. The results are compared to ALCO policy limits which specify a maximum tolerance level for net interest income exposure over a one-year horizon, assuming no balance sheet growth and a 200 basis point upward and a 100 basis point downward shift in interest rates. Additional tools to monitor potential longer-term interest rate risk, including periodic stress testing involving hypothetical sudden and significant interest rate spikes, are also evaluated.

The following table summarizes the percentage change in net interest income as compared to the base scenario, which assumes no change in market interest rates as generated from the standard simulation model. The results are presented for each of the first two years of the simulation period for the 200 basis point increase in interest rate scenario and the 100 basis point decrease in interest rate scenario. These results are well within the ALCO policy limits as shown:

As of September 30, ~~2022:~~2023:


		Change in Interest Rate			Change in Interest Rate
		+ 200 basis points	- 100 basis points		+ 200 basis points	- 100 basis points
Calculated change in Net Interest Income - Year 1	Calculated change in Net Interest Income - Year 1	(1.50)%	(0.59)%	Calculated change in Net Interest Income - Year 1	(3.4)%	0.9%
Calculated change in Net Interest Income - Year 2	Calculated change in Net Interest Income - Year 2	11.91%	5.45%	Calculated change in Net Interest Income - Year 2	13.5%	12.4%

~~Historically, there has existed~~The balance sheet shows an inverse relationship between changes in prevailing rates and ~~the Company's~~Arrow's net interest income in the near term, suggesting that liabilities and sources of funds generally reprice more quickly than earning assets. ~~In recent months, higher cash balances and core deposits have contributed to a shift toward asset sensitivity. When~~However, when net interest income is simulated over a longer time frame, the balance sheet shows a relatively neutral profile with a long-term ~~bias toward~~ asset sensitivity, as asset yields continue to reprice while the cost of funding reaches assumed ceilings or floors.

The hypothetical estimates underlying the sensitivity analysis are based upon numerous assumptions, including: the nature and timing of changes in interest rates including yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. While assumptions are developed based upon current economic and local market conditions, Arrow cannot make any assurance as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.

Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will differ due to: prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate changes on caps or floors on adjustable rate assets, the potential effect of changing debt service levels on customers with adjustable rate loans, depositor early withdrawals and product preference changes, unanticipated shifts in the yield curve and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates.

Item 4.

CONTROLS AND PROCEDURES

~~Senior management, including~~Management, under the supervision and with the participation of the Chief Executive Officer ("CEO") (who is our principal executive officer) and ~~Interim~~ Chief Financial Officer ~~has~~("CFO") (who is our principal financial officer), evaluated the effectiveness of ~~the design and operation of Arrow's~~our disclosure controls and procedures, ~~(as~~as defined in Rule 13a-15(e) ~~under~~and 15d15(e) of the Securities Exchange Act of 1934, as ~~amended)~~amended (the "Exchange Act"), as of September 30, ~~2022. Based upon~~2023. The term "disclosure controls and procedures" means controls and other procedures of a company that ~~evaluation, senior~~are designed to ensure that:

•information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms; and

•information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including the ~~Chief Executive Officer~~principal executive and ~~Interim Chief Financial Officer,~~principal financial officers, or persons and committees performing similar functions, such as the Audit Committee, as appropriate to allow timely decisions regarding required disclosure.

Based on this evaluation, management concluded that ~~disclosure~~our internal control over financial reporting was not effective due to the following unremediated material weaknesses identified in our internal control over financial reporting, previously disclosed on the 2022 Form 10-K:

•We did not maintain effective monitoring controls related to 1) Internal Audit’s testing of management’s internal control over financial reporting, 2) the completeness and accuracy of information presented to the Audit Committee by Internal Audit, and 3) the related Audit Committee oversight over Internal Audit’s testing of management’s internal control over financial reporting.

•With regard to the conversion of our core banking information technology system, we did not effectively perform risk assessment procedures ~~were effective.~~ to identify the impact of the conversion on our internal control over financial reporting.

The material weaknesses did not result in a material misstatement of our annual or interim financial statements or previously released financial results.For additional information please refer to Part II - Item 9A. of the 2022 Form 10-K.

Prior to filing this Report, we performed relevant and responsive substantive procedures as of September 30, 2023, in order to complete our financial statements and related disclosures. Based on these procedures, management believes that our consolidated financial statements included in this Report have been prepared in accordance with GAAP. Our CEO and CFO have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-Q, fairly present in all material respects the financial condition, results of operations, and cash flows of the Company as of the dates, and for the periods presented in this Report.

During the first quarter ~~ended September 30, 2022, Arrow implemented~~of 2023 we initiated, and will continue to implement, measures designed to improve our internal control over financial reporting to remediate the deficiencies that comprised the material weaknesses, including engaging a ~~new~~professional services firm to review the Company’s control program required by the Sarbanes-Oxley Act of 2002, as amended, and assist Management with its overall Company-wide processes and with selecting and developing control activities designed to mitigate risks and support achievement of control objectives As part of management’s remediation efforts in this area, management has now performed a risk assessment around the impact of the core banking system conversion over internal controls over financial reporting. As a result, the Company has identified the need for additional controls to mitigate risks and support the achievement of control objectives. These controls are being implemented as part of the ongoing, overall remediation efforts.

In addition, the Company is in the process of evaluating the assignment of responsibilities of internal and external resources associated with the performance of internal controls over financial reporting ~~were revised in connection with this change. Arrow's pre-~~ and ~~post-implementation~~will consider hiring additional resources, contracting external resources, and/or providing additional training to existing resources as appropriate. In addition, we have initiated a process to identify and maintain the information required to support the functioning of internal controls over financial reporting ~~were both evaluated by management~~ and ~~deemed~~ to establish and reinforce communication protocols, including required information and expectations to enable personnel to perform internal control responsibilities (e.g., formal training programs and corporate communications).

The material weaknesses set forth above will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and Management has concluded, through testing, that these controls are operating effectively. We may also conclude that additional measures may be required to remediate the material weaknesses in our internal control over financial reporting.

Even once remediated, our internal controls over financial reporting may not prevent or detect all misstatements because of their inherent limitations. Further, no internal control over financial reporting framework can provide absolute assurance that all instances of fraud will be detected and prevented. Additionally, any projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.

Other than the ongoing remediation efforts described above, there were no other changes in Arrow's internal control over financial reporting that occurred during the quarter ended September 30, ~~2022,~~2023, that materially affected, or are reasonably likely to materially affect, Arrow's internal control over financial reporting.

7279

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

Except as noted below, Arrow, including its subsidiary banks, is not currently the subject of any material pending legal proceedings, other than ordinary routine litigation occurring in the normal course of their business. On an ongoing basis, Arrow is often the subject of, or a party to, various legal claims by other parties against Arrow, by Arrow against other parties, or involving Arrow, which arise in the normal course of business. Except as noted below, the various pending legal claims against Arrow will not, in the opinion of management based upon consultation with counsel, result in any material liability.

On July 1, 2020, Daphne Richard, a customer of ~~GFNB~~Glens Falls National Bank and Trust Company (“GFNB”), filed a putative class action complaint against ~~GFNB in the United States District Court for the Northern District of New York.~~GFNB. The complaint ~~alleges~~alleged that GFNB assessed overdraft fees on certain transactions drawn on ~~her~~Ms. Richard’s checking account without having sufficiently disclosed its overdraft-fee practices in its account agreement. Ms. Richard, on behalf of two purported classes, ~~seeks~~sought compensatory damages, disgorgement of profits, statutory damages, treble damages, enjoinment of the conduct complained of, and costs and fees. OnThe complaint was similar to complaints filed against other financial institutions pertaining to overdraft fees. The Court granted final approval of a settlement on July 22, ~~2022, the court approved a~~2022. The settlement, ~~agreement among~~which includes and releases Arrow, GFNB, and SNB (collectively, “Defendants”), required the Defendants to establish a $1.475 million settlement fund, among other terms. The case has been closed, and the ~~plaintiffs, pursuant~~settlement funds have been substantially distributed to ~~which, among other things, during~~ the ~~quarter ended~~class.

The Company became aware that on June 23, 2023, Robert C. Ashe filed a putative class action complaint against the Company in the United States District Court for the Northern District of New York. In addition to the Company, the complaint names as defendants Thomas J. Murphy, the Company’s former CEO and from September 30, 2022 ~~Arrow established~~to February 20, 2023, its interim CFO, Edward J. Campanella, the Company’s former CFO, and Penko Ivanov, the Company’s current CFO (“Individual Defendants” and, together with the Company, the "Defendants"). The complaint alleges that the Defendants made materially false and misleading statements regarding the Company’s business, operations and compliance policies in the Company’s public filings between March 12, 2022 and May 12, 2023. The complaint further alleges that the Individual Defendants are liable for these materially false and misleading statements as "controlling persons" of the Company. Based on these allegations, the complaint brings two claims for violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder and of Section 20(a) of the Exchange Act. Mr. Ashe, on behalf of a ~~settlement fund~~purported class of ~~approximately $1.5 million, which had been accrued for in 2021. Arrow expects~~shareholders, seeks compensatory damages as well as recovery of the ~~fund~~costs and fees associated with the litigation. A consolidated amended complaint is due December 5, 2023, and Defendants’ deadline to answer, move, or otherwise respond to the consolidated amended complaint is February 2, 2024. The Company believes the lawsuit to be ~~fully disbursed by April 2023, after which the case will be closed. Arrow~~without merit and expressly denies any wrongdoing in connection with the matters claimed in the ~~complaint.~~

complaint and intends to vigorously defend the lawsuit.

Item 1.A.

Risk Factors

~~Except as set forth below, the~~The Risk Factors identified in ~~Arrow's Annual Report on~~the 2022 Form 10-K ~~for the year ended December 31, 2021~~ continue to represent the most significant risks to Arrow's future results of operations and financial ~~conditions.~~

~~Potential Complications with the implementation of our new core banking system could adversely impact our business and operations.~~

Arrow relies extensively on information systems and technology to manage the company's business and summarize operating results. During September 2022, Arrow completed the implementation of a new core banking system which replaced the prior system. The new core system will enable future enhancements to our digital experience, improve efficiency for our teams and customers, and empower data-driven decisions. This upgrade constitutes a major investment in Arrow’s technology needs and is a key initiative within its strategic plan. The new core system implementation process has required, and will continue to require, the investment of significant personnel and financial resources. We are now using the new core system. We encountered some limited issues and worked to minimize any inconvenience to customers, but there can be no assurance that such issues will not arise in the future.conditions, without further modification or amendment.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

~~The following table presents information about purchases by Arrow during~~During the three months ended September 30, ~~2022~~2023, Arrow had no purchases of common stock (our only class of equity securities registered pursuant to Section 12 of the ~~Securities~~ Exchange ~~Act~~Act). As of ~~1934):~~

Third Quarter
2022
Calendar Month
(A)
Total Number of
Shares Purchased 1
(B)
Average Price
Paid Per Share 1
(C)
Total Number of
Shares Purchased as
Part of Publicly
Announced
Plans or Programs 2
(D)
Maximum
Approximate Dollar
Value of Shares that
May Yet be
Purchased Under the
Plans or Programs 2
July 3,653 $ 32.22 — $ 2,614,973
August 1,435 34.67 — 2,614,973
September 19,187 32.26 2,508 2,535,669
Total 24,275 32.40 2,508

1~~The total number~~September 30, 2023 , the maximum approximate dollar value of ~~shares purchased by Arrow and the average price paid per~~ share listed in columns (A) and (B) consist of (i) any shares purchased in such periods in open market or private transactions under the Arrow Financial Corporation Automatic Dividend Reinvestment Plan (the "DRIP") by the administrator of the DRIP, (ii) shares surrendered or deemed surrendered to Arrow in such periods by holders of options to acquire Arrow common stock received by them under Arrow's long-term incentive plans in connection with their stock-for-stock exercise of such options and (iii) sharesthat may yet be purchased under the publicly-announced ~~2022~~2023 Repurchase Program. was $4,152,132. In ~~the months indicated, the listed number of shares purchased included the following number of shares purchased by Arrow through~~

such methods: July - DRIP purchases (3,653 shares); August - DRIP purchases (589 shares) and stock-for-stock option exercises (846 shares).; and September - DRIP purchases (16,679 shares) and repurchased under the 2022 Repurchase Program (2,508 shares)

2Includes only those shares acquired by Arrow pursuant to its publicly-announced stock repurchase programs. Arrow's only publicly-announced stock repurchase program in effect for the third quarter of 2022 was the 2022 Repurchase Program approved byOctober 2023, the Board of Directors expanded the 2023 Repurchase Program by $5 million, bringing the total availability under the repurchase program to $9.1 million, and ~~announced~~removed the expiration date previously incorporated into the existing repurchase program. Subsequent to the balance sheet date, Arrow repurchased 23,779 shares of common stock at an average cost of $23.60.

Further, although Arrow had suspended the operation of the DRIP as a result of the now resolved delay in filing the 2022 Form 10-K and the First Quarter 10-Q, Arrow will be resuming the DRIP in the fourth quarter of 2023 in connection with the payment of the quarterly cash dividend of $0.27 per share declared by the Arrow Board of Directors on October ~~2021,~~25, 2023 and payable on December 15, 2023 to shareholders of record on December 1, 2023. All shares of common stock acquired under ~~which~~ the ~~Board authorized management, in its discretion, to repurchase from time to time over calendar year 2022, in~~new DRIP will be purchased by the plan's purchasing agent (also the Plan Administrator), Equiniti Trust Company ("EQ"), on the open market or in privately negotiated transactions, up to $5 million of Arrow common stock subject to certain exceptions. The Board of Directors of Arrow recently approved a new stock repurchase program authorizingfor the ~~repurchase, at~~participant’s account. Participation under the ~~discretion of senior management, of up to $5 million of the Company’s common stock over the 2023 calendar year, in open-market or negotiated transactions. This new repurchase program~~DRIP will ~~replace the prior $5 million repurchase program authorized on October 27, 2021, which expires December 31, 2022.~~automatically resume for Company shareholders that were previously enrolled.

Item 3.

Defaults Upon Senior Securities - None

Item 4.

Mine Safety Disclosures - None

Item 5.

Other Information ~~- None~~

Rule 10b5-1 Trading Arrangements

During the three months ended September 30, 2023, none of Arrow’s directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted, terminated or modified a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408 of Regulation S-K of the Securities Act of 1933).

Item 6.

Exhibits


Exhibit Number			Exhibit
3.(i)			Certificate of Incorporation of the Registrant as Amended through June 3, 2019, incorporated by reference from the Registrant's Current Report on Form 8-K filed June 5, 2019, Exhibit 3.1
3.(ii)			By-laws of the Registrant, as amended, incorporated herein by reference from the Registrant’s Current Report on Form 8-K filed on November 24, 2009, Exhibit 3.(ii)
~~10.1~~			Professional Services Agreement, dated as of October 1, 2022, by and between Arrow Financial Corporation and Edward J. Campanella, incorporated herein by reference from the Registrant’s Current Report on Form 8-K filed on October 6, 2022. *

15			Awareness Letter
31.1			Certification of Chief Executive Officer under SEC Rule 13a-14(a)/15d-14(a)
31.2			Certification of Chief Financial Officer under SEC Rule 13a-14(a)/15d-14(a)
32			Certification of Chief Executive Officer under 18 U.S.C. Section 1350 and Certification of Chief Financial Officer under 18 U.S.C. Section 1350
101.INS			XBRL Instance Document
101.SCH			XBRL Taxonomy Extension Schema Document
101.CAL			XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF			XBRL Taxonomy Extension Definition Linkbase Document
101.LAB			XBRL Taxonomy Extension Labels Linkbase Document
101.PRE			XBRL Taxonomy Extension Presentation Linkbase Document

* Management contracts or compensation plans required to be filed as an exhibit.

7481

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

ARROW FINANCIAL CORPORATION

Registrant



November ~~7, 2022~~9, 2023			/s/~~Thomas J. Murphy~~ David S. DeMarco
Date			~~Thomas J. Murphy~~David S. DeMarco
			President and Chief Executive Officer
			(Principal Executive Officer)

November ~~7, 2022~~9, 2023			/s/~~Thomas J. Murphy~~ Penko Ivanov
Date			~~Thomas J. Murphy~~Penko Ivanov

			~~Interim~~ Chief Financial Officer
			(Principal Financial ~~Officer~~ and Accounting Officer)
			~~Principal Accounting Officer)~~

7582


			Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements			3
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			4549
Item 3. Quantitative and Qualitative Disclosures About Market Risk			7278
Item 4. Controls and Procedures			7278


PART II - OTHER INFORMATION
Item 1. Legal Proceedings			7380
Item 1.A. Risk Factors			7380
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			7380
Item 3. Defaults Upon Senior Securities			7480
Item 4. Mine Safety Disclosures			7480
Item 5. Other Information			7480
Item 6. Exhibits			7481

SIGNATURES			7582


Average Consolidated Balance Sheets and Net Interest Income Analysis


(Dollars In Thousands)

Quarter Ended September 30:	2022						2021
			Interest		Rate				Interest		Rate
	Average		Income/		Earned/		Average		Income/		Earned/
	Balance		Expense		Paid		Balance		Expense		Paid
Interest-Bearing Deposits at Banks	$	209,001	$	1,201	2.28	%	$	416,500	$	163	0.16	%
Investment Securities:
Fully Taxable	651,899		2,603		1.58		494,869		1,632		1.31
Exempt from Federal Taxes	169,153		785		1.84		181,111		855		1.87
Loans	2,872,066		29,618		4.09		2,641,726		27,157		4.08
Total Earning Assets	3,902,119		34,207		3.48		3,734,206		29,807		3.17
Allowance for Credit Losses	(28,006)						(27,040)
Cash and Due From Banks	32,475						38,036
Other Assets	141,150						156,839
Total Assets	$	4,047,738					$	3,902,041
Deposits:
Interest-Bearing Checking Accounts	$	996,116	267		0.11		$	923,002	155		0.07
Savings Deposits	1,549,451		2,469		0.63		1,496,938		424		0.11
Time Deposits of $250,000 or More	49,459		89		0.71		71,435		39		0.22
Other Time Deposits	136,834		150		0.43		141,721		133		0.37
Total Interest-Bearing Deposits	2,731,860		2,975		0.43		2,633,096		751		0.11
Short-Term Borrowings	—		—				2,012		—		—
FHLBNY Term Advances & Other Long-Term Debt	45,000		283		2.50		65,000		370		2.26
Finance Leases	5,125		48		3.72		5,175		48		3.68
Total Interest-Bearing Liabilities	2,781,985		3,306		0.47		2,705,283		1,169		0.17
Noninterest-bearing deposits	866,659						802,837
Other Liabilities	37,419						34,537
Total Liabilities	3,686,063						3,542,657
Stockholders’ Equity	361,675						359,384
Total Liabilities and Stockholders’ Equity	$	4,047,738					$	3,902,041


Net Interest Income			$	30,901					$	28,638
Net Interest Spread					3.01	%					3.00	%
Net Interest Margin					3.14	%					3.04	%


Third Quarter 2022 Calendar Month	(A) Total Number of Shares Purchased 1	(B) Average Price Paid Per Share 1		(C) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs 2	(D) Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs 2
July	3,653	$	32.22	—	$	2,614,973
August	1,435	34.67		—	2,614,973
September	19,187	32.26		2,508	2,535,669
Total	24,275	32.40		2,508